It is measure of how fragile and precarious the situation is that the moment the markets looked like they were on the verge of crashing again, which of course they were, the Fed moved to head it off by saying that they would start cutting rates. How things change as it was only late last year that they were talking about raising rates three or four times this year. Basically what has happened is that they have lost control they don’t control the markets, the markets control them. The reason that they gingerly raised rates into last year was they were trying to build up some “wiggle room” ahead of the next crisis—well, the next crisis is on our doorstep, and they are already using up their now very limited ammo.
There is a big difference between now and 2008, when they were able to drop rates from 5% to zero, because now they can only drop them from about 2%. This talk about cutting rates and the actual cutting of rates going forward is too little too late—the effects of the earlier higher rates against a background of massive debts and of the trade war are working their way through the system, are a destructive juggernaut that will not be stopped by tinkering around with already very low interest rates. Thus the relief rally yesterday that is continuing this morning is expected to peter out and reverse to the downside before much longer.
Instead what they are likely to achieve by cutting rates is to cause a severe decline in the dollar, which until now has basked in its “king of hell” status, since although rates in the U.S. were historically low, they were higher than in other places like Europe and Japan, and thus money was attracted into the dollar and U.S. investments. Pretty soon we are going to find out how attractive U.S. investments are to foreigners when the dollar tanks.
Thus, a key point for us to appreciate here is that a new rate reduction program by the Fed will cause the dollar to drop hard—and it is already under threat from the move to de-dollarize by countries like China and Russia, which have been the subject of U.S. bullying and threats for a long time now. The Fed can’t have its cake and eat it too—if it wants to go ahead and drop rates to rescue the stock market, fine, then the dollar will tank, and the stock market too into the bargain because a lot of overseas investors facing currency losses will pull their funds from the US.
This is why gold is strong now and why it is soon going to break abouve $1400 into a major new bull market, and this is why we will be concentrating more and more on the still very undervalued precious metals sector going forward.
Originally posted at 6.45 am EDT on 5th June 2019 on CliveMaund.com.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.