Fed Rate Cut to Record Low
December 17th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
On gold, I expected more of an initial move above $850 than what actually materialized (spot hit $860.70). However, if the move is going to be sustained, it will go in waves. There’s a surge and then consolidation, surge, consolidation, etc.
On the daily interval, the gold chart still looks very sick. It is moving in a down trending channel. On the longer interval intraday charts, however, the rally over the last several says looks quite healthy. Know that we’re approaching the upper channel line on the daily at around $885, with both the stochastic and RSI in extreme overbought territory. For shorter term traders with profit, I would be very cautious about trying to fight overhead resistance AND extreme oscillators. Consider entering stops or paring your position down. There’s no way to know if it will break up and out of this channel. If it does, that’s very bullish.
(I would be embarrassed to admit how much time I’ve spent looking for quantitative ways of forecasting reversals out of channels. So, when I say that there’s no way to know, what I mean is that I have no way of knowing. Maybe someone knows how to do it.)
The dollar has been hammered, as widely anticipated here and elsewhere. If we see follow through on the dollar breakdown, and there’s a very good chance that we will, there’s a corresponding good chance that gold will break up and out of the channel.
Maybe the Fed will start buying those U.S. Treasuries and really get this party started.
As usual, I must add that I don’t trade paper gold; futures, ETFs etc. I buy the physical metal and then forget about it.
Here are a couple charts that show the the recent rally on an intraday basis and the resistance ahead on the daily interval:
Spot gold, two hour interval
Spot gold, daily interval
Finally, congratulations to all of Cryptogon’s BullionVault clients from around the world who have been buying so heavily in recent weeks at much lower prices. Well done.
Via: Wall Street Journal:
The Federal Reserve cut its target interest rate Tuesday to historic lows between zero and a quarter percentage point and said it could expand a program of unorthodox lending and securities purchases.
After two days of discussion among Fed officials, the central bank said it would use every weapon from its arsenal to lift the U.S. from recession. It began by reducing its target interest rate — an overnight bank lending rate called the federal-funds rate — from 1%. Another Fed lending rate, the discount rate, will go to half a percentage point.
The cut was more than many economists expected, and the statement that came with it marked the latest signal by the Fed and its chairman, Ben Bernanke, that the central bank was prepared to take aggressive steps to revive the economy.
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Fed said in a statement. It added that it expected interest rates to remain “exceptionally” low for some time, a subtle commitment to the current policy that could help bring down longer-term interest rates.
In normal times, lower rates reduce the cost of borrowing for households, businesses and financial institutions, which spurs borrowing and economic activity. Those effects are being muted now, however, because many businesses and households are weighed down by heavy debts.
Still, stocks rallied on the news of the Fed’s action. The Dow Jones Industrial Average finished at 8924.14, up 359.61 points, or 4.2%, on the day. Treasury bonds rallied, sending their yields lower. Yields on 10-year Treasury notes hit 2.269%. The dollar sank against the euro and the yen.
A number of official borrowing rates — such as rates on three-month Treasury bills — have tumbled to near zero, a level they haven’t been near since the Great Depression.
President-elect Barack Obama used the Fed move as a rallying call for more fiscal stimulus, the idea of more government spending or tax cuts, which Fed officials support.
“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said in a news conference. “They’re getting to be about as low as they can go. And although the Fed is still going to have more tools available to it, it is critical that the other branches of government step up.”
The trouble for Fed officials is that while official borrowing rates are very low, interest rates for borrowers with even a modicum of risk remain far above levels of a few months ago, which is squeezing the economy.
Beyond lowering interest rates, the central bank said it could expand lending programs, including a plan to buy mortgage-backed securities. The Fed also said it was studying such rescue measures as purchasing U.S. Treasury securities, which could help reduce long-term borrowing rates.
Sixteen months into a campaign to lift the U.S. economy from a gathering financial storm, the Fed’s efforts have so far failed. In the latest example of the deepening recession, the Commerce Department reported that new home building dropped 19% in November, to a seasonally adjusted annual rate of 625,000 units, a record monthly low.
I”m currently long some gold minis, and based on the fib retracements (which are based on the March high to the Oct low), I get 879 as the 76.4% retracement, which is also a resistance level (based on the fact that it was a major support before and even after it fell from the high. (Look at the action from 9/18 to 10/2.)). Anyway, I’m going to put in a 20pt trailings stop when it hits that level. FWIW.
Almost overlapping resistance levels… This is going to be interesting to watch.
I wonder what dagobaz thinks on this one. She’s probably too busy running and gunning right now.
i think gold will breakout, tgt 925; 975
as to what I think is going to happen on the economic front, I think with this move, we are all pretty much done, here in the US.
denninger, re: bernanke’s hobson’s choice:
“Now tell me again why you’re willing to get up and go to work when the organization that is effectively taxing you through these policies won’t tell you how much you’re going to be paying and the truth about why?
Here’s yet another problem on the “unintended consequences” side, beyond the fact that the market can (and will) call Bernanke’s bluff to buy “everything and anything” – its that there is no longer any reason whatsoever for you, or anyone else, to keep money in a bank account or Treasuries when the rate of return is in fact negative.
That’s right – as of today there are money market accounts that have negative yields, and yet those funds are critical to the commercial paper markets.
What’s Ben going to do about that little problem?
He can’t force people to keep their money in an “investment” that has a negative return! And yet that is precisely what Bernanke did today – he guaranteed that virtually every single money market account across America will be decimated with withdrawal requests in the coming days and weeks.
And why not? Why would you be so stupid as to keep your money in an account that is guaranteed to lose not just value but actual principal? ”
what this yells to me is that since the banks borrow short to end long, and since the market will by definition attempt to fix risk, the market will burst bernanke’s treasury bubble and chaos in the bond markets will result. this will inevitably lead to hideous supply / food disruptions and more greek style mess.
not going to be a pretty new year. not at all. an AWFUL lot of people are going to get hurt.
I wonder, do you think ole bho has figured out that he has bought the ranch, yet ?
Yep, the potential breakdown of the Treasury situation is the event beyond which I can’t begin to imagine.
I have spent the last 3 years watching and planning for the grand finale, which is the crashing of the TBill market.
We are almost at step 4, after that it is just logical guesses at how the central banking crime families will continue to make money, which they will even if my guesses are wrong.
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1. Crash the equities markets and herd everyone into cash in banks.
2. Then crash the banks and herd everyone into T-Bills.
3. The yield goes to almost zero based on the new demand.
4. IMF downgrade of AAA credit rating, a resulting huge increase in interest rates
5. Crash Tbill prices.
6. Lower Reserve ratios to 0
7. Banks write off all loans
8. Allow Federal Reserve to pay interest on deposits at the Fed.
9. Banks hoard enormous amounts of cash recently stolen from treasury and earn interest from Fed.
10. Start a massive war to self-destruct the US infrastructure
11. Banks lend the money at new, high interest rate, to the defense contractors for WWIII.
12. Surviving Chinese infrastructure rebuilds world using US as farmland.
13. The New Chinese Century.
@GK: 8. and 9. are brilliant. And it will of course be spun as being “a necessary measure to strengthen the economy”.
As for gold:
Yet another resistance at the low 880 level: today’s high (883.60) was just shy of the 233-day MA (884.70) — based on chart of front month GC contract. As of 1:00 pm Eastern US time.
My “long term prediction” (FWIW): more deflation (say another 12 months or so), and then all the excess cash catches up with the market and we enter a long term period of intense inflation. This is assuming no super-crazy incidents (e.g., 9/11 II of one form or another).
GK This might sound like a weird question, but is there any best reformist action which Obama could do in February which would mitigate any of that? In other words, does he have any power, if he were well-intentioned, or is this a series of dominoes?
@anothernut: I agree that #8 and #9 are brilliant in a criminal sort of way. You have to slog through lots of boilerplate fed announcements to find the legal changes that allow it, but they are there now.
@quintanus: That is exactly the right question, but watching BHO load up his cabinet with goons for the global central banking crime families leads me to believe he has already locked and loaded the dominoes.
If, however, he were to turn on them and live (HAHAHA, right!) then he would revoke the charter of the Federal Reserve Bank stolen from Congress in 1913, return control of money supply to Congress as required in the Constitution.
Pay off all $12 trillion of old debt with new constitutional money, remove the income tax (that was started right after the Federal Reserve Act of 1913 to pay interest on Fed notes) and return to a federal government funded by tariffs and fees. Anything they could not afford would be returned to the States’ control.
The common sense tariffs would protect US corporations and workers from predatory trade (despite the howls from the predatory Japanese Toyota global monopoly-in-the-making).
The military would return to each state after returning from unconstitutional overseas adventures.
But, not being delusional (yah, right!), I put my investments in #12 and my butt in New Zealand, as if it all really will make any difference.