Bailout Ben Bernanke, Chairman of U.S. Federal Reserve, last week demonstrated the intellectual bankruptcy at that institution. No broad based economic need for a 50 basis point interest rate cut was evident. Only purpose of rate cut was to aid investment banks and mortgage brokers. Further, that interest rate cut is now politically impossible to reverse without a crisis in the value of U.S. dollar. This rate cut was a clear signal that dollar, intentionally or due to indifference, would be sacrificed to meet Fed's unspecified agenda. U.S. dollar, as shown in graph, in an undulating bear market, moved to a new low on Fed's action. If chart was of price of a stock, most would call it a sell. Federal Reserve's willingness to sacrifice value of U.S. dollar was reflected in the strong rally by Gold.
Despite U.S. dollar's bear market, confirmed by policy actions of Federal Reserve, foreign exchange markets may have over reacted in the short-term. "Over shooting" is the term used to describe such action by the foreign exchange markets to an unanticipated event. In the short-term, U.S. dollar is over sold, and at a minimum due for a bounce. Loonie's over extended rally is also a result of this turmoil, and should be recognized as such. As a consequence of these events, $Gold became extremely over bought. $Gold should correct the "over shoot". As $Gold moves to perhaps $700 or lower, investors should add to positions. We can then begin talking about the $800 level. And longer term, the actions of Federal Reserve makes the $1,400+ target more likely than ever to happen.
GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. For a subscription go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html. Ned will be exploring the Gold Super Cycle at The Wealth Expo in NYC, 19-21 October. For information go to www.wealthexpo.net.