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?

Western Goldfields Inc - 1.61% up
Agnico-Eagle Mines Ltd - 4.95% up
Alamos Gold Inc - 4.27% up
Goldcorp Inc - 3.19% up
Newmont Mining - 0.42% up
Zhaojin Mining - 18.63% down Hong Kong
Lingbao Gold - 16.19% down Hong Kong

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?).

Gold stocks of interest and a Silver trigger

So gold continues to rise. And as this incredible run continues, the call for it to end abruptly increase. Many have stated that they see this as an aberration. That none of the factors in the market support such a strong and steady rise. Fear is moving along with the price, as often occurs when dramatic changes happen.

But there are a few that feel this rise is not only justified it’s completely logical. Those events such as the mortgage crisis, weak Dollar, Fed rate cuts, oil per barrel prices and other factors have to equate to a move in gold spot prices. This says nothing of the increase in demand coming from China and India.

In one particular case we see that Chip Hanlon on TheStreet.com has made a case for 9 gold stocks that can benefit from the continuing interest in gold. One of those stocks you may recall from a recent post here, which has made new 52 week highs recently. That stock is Newmont Mining and in the number 1 position on the list.

“…an unhedged giant that produces gold in many corners of the world, from North America to South America to Asia. Gold bugs, who tend to dislike companies that hedge their production for any reason, tend to favor this stock as a leading large-cap choice.”

In the number 2 position is another popular and oft mentioned Goldcorp.

"Record gold production for the company in 2007 is expected to be followed by another record in 2008, and the company just announced its first monthly dividend a few days ago."

Perhaps one of the more interesting items on the list is the number 10 pick. The Silver ETF is the last choice on that list. It would seem that silver is a contra-indicator. By that I mean, once silver begins to have its run, gold tends to end its run. Since silver has not been influenced yet, it would indicate that gold has more room to go.

“…silver tends to rally most strongly at the end of major gold moves (as do the most junior, speculative mining shares). The fact that silver has not yet blown off suggests to me that more upside remains.”

The entire concept is interesting since this article looks at riding the run of gold and working on the ultimate question in all stock purchases – timing. Not only has he picked 9 gold stocks to ride the bull, he has also looked at riding the one position that may indicate the end of the run and the growth of perhaps a gold bear.

Never doubt that the people over at TheStreet.com are on the ball.