Fed interest rate cut and a bear market nearby bring attention to gold

So where does gold, and gold stocks, go in this new market of overnight rate cuts? Yesterday the American stock market was closed for the Dr. Martin Luther King holiday, but the rest of the world markets dropped like rocks. Europe was down almost 7% in each nation, China dropped 5.5% and India fared no better.

So in the face of that news the U.S. markets opened with a drop of 450 points, and the Fed cut interest rates .75 basis points. It’s taken the rest of the day but the market seems to have recovered virtually all of the loss.

But what happens next?

Well the chance of the U.S. stock market dropping 18.5% was one factor driving the price of gold. While the interest rate move has been an impressive move not seen in decades, it also means that the real effects of the rate cute won’t be felt for 6 months at the very earliest. The losses from the mortgage crisis are still not over, and I still continue to see further hits to the various financial securities. Oil is still higher than it has been for decades. Consumer debt has reached more than 50% of the U.S. population.

Gold may have retreated a bit, but the environment hasn’t changed in my opinion. And I’m not alone.

“We suspect that the cuts won’t work. Sentiment has turned and people and companies are now focused on rebuilding their balance sheets. Looser lending conditions will be used to repay debt, not to borrow more. One way or the other, the US is heading for recession, and rate cuts now only risk making inflation a real threat.Of course, it’s all good news for gold. Gold has sold off recently, almost certainly in part due to various players rushing to liquidate easily sold assets to fund losing positions elsewhere. It looked set to fall further today, but the Fed’s announcement arrested the decline almost immediately. We suspect it will be back above $900 an ounce before too long. - John Stepek”

I agree that the current drop in gold has more to do with liquidation for cash in hand than any change in sentiment. Given 3 days for settlement of trades, and margin calls to come out, there may well be a change in direction back to the previous trend.

"This smacks of panic and desperation, but is obviously bullish for gold as interest rate cuts make gold more attractive," said Robin Bhar, UBS metals analyst in London.

So what have some of the gold stocks mentioned recently in this blog done on this turbulent day?

Now if you have been paying attention I mentioned there would be a drop to 11,000 on the Dow. That there would be a bear market. That gold would do well, and the financial markets would fare poorly. Given the rate cut today, and the other factors pressuring the market, I continue to believe this will happen.

With the added threat of inflation becoming rampant, I feel this is more true now than back on January 4th (Gold soars in early 2008, but will it stay lofty?) and prior(Will 2008 be a lump of coal or a nice present for investors?).

Labels: Agnico-Eagle Mines Ltd, Alamos Gold Inc, bear market, gold stocks, interest rate, John Stepek, Newmont Mining, recession, Robin Bhar, stock market