Gold
Gold surged on the news of the emergency Federal Reserve 0.75% interest rate cut to 3.5% prior to the opening of markets in New York. Gold had briefly fallen to just below $850 per ounce in trading late in Asia before surging to over $890 (or some 4.7% from the low of the day to the close in New York). Similarly silver fell as low as $15.40 prior to surging to $16.15. Then gold was up $7.90, or nearly 1 percent, to $889.80 an ounce in trading in New York and silver was down 7 cents to $16.02 per ounce. Both subsequently traded sideways in Asia overnight and have fallen marginally in early European trading.

The London AM Fix at 1030 GMT this morning was at $887.80 (up from $862 on yesterday). Gold surged in all major currencies and to near record highs in GBP and EUR and fixed at £453.50 (up from £442.59 yesterday) and €609 (up from €595.22 yesterday).

As we anticipated the Federal Reserve cut interest rates sharply despite significant inflationary pressures and this led to another sharp decline in the dollar and this combined with safe haven demand led to gold’s strong performance again yesterday. This morning the dollar has weakened marginally against the pound and the euro (1.955 and 1.4586) and oil has again weakened (down 1.7% to $87.70 <NYMEX February>) which is likely the reason for gold’s slight sell off in early European trading. Profit taking in the short term may be expected after yesterday’s surge in price.

But the recent rally in stock markets and indeed in the dollar will unfortunately likely be another dead cat bounce and both the dollar and major industrial equity markets appear to be in secular bear markets. U.S. stock markets did recover from their sharp lows but still fell for the day. Asian stock markets were mixed but generally up and European stock markets have again sold off this morning.

There are rumours that the sharp decrease in rates was the Federal Reserve’s response to financial data that has not yet been made public and thus they may be privy to and have knowledge that the economy has taken a dramatic turn for the worse. It is believed that there will be further interest rate cuts of as much as 50 basis points as early as next week and another 50 basis points by March taking the rate down to 2.5%.

Real interest rates are now negative which is obviously bullish for gold. It looks increasingly like the U.S. economy and financial system is in an even worse state than even gloomier economists and analysts had believed.

Yesterday Robert B. Reich, the Secretary of Labor under Clinton (no pun intended), and Nigel Lawson, British Chancellor of the Exchequer between June 1983 and October 1989, both warned of a possible economic meltdown and another form of great Depression in the U.K. and U.S. (in two separate forums on Channel 4 News and BBC’s Newsnight).

This dramatic move (and any further ones) by the Federal Reserve will likely in the fullness of time be seen as a panicked and reckless response to the unfolding financial and economic crisis. Western economies are akin to heroin addicts chronically addicted to cheap money or heroin and the Federal Reserve is administering another liquidity injection. Hardly the recipe for a healthy recovery of the patient.

Likely increasing turmoil in international markets will lead to safe haven demand for gold. Gold remains the ultimate safe haven asset which is seen in the Performance Table above. This will be realised by the wider financial markets and investment community in the fullness of time.

Support and Resistance
Strong support now remains at $840 to $850 which was previous resistance and interestingly $840 is very close to the 50 day moving average (DMA) and Fibonacci support.
Gold is likely to remain above $840 given the macroeconomic climate and in the short term we are more likely to reach $1,000 than to decline to $800.

FX
The unscheduled announcement by the Federal Reserve yesterday instantaneously created a spike in volatility in the FX markets. The move was intended to be a shot in the arm for the U.S. economy (read U.S. Stock Markets) and an attempt to restore confidence to financial markets. The effects are yet to be seen, however the intraday knee-jerk reaction was predictable. As stocks rallied on Wall Street, short term speculators appetite for risk returned and the carry trade has temporarily returned. The Japanese yen fell heavily against all major currencies and all commodity currencies. A combination of the interest rate differential and acknowledgement that the U.S. economy is in significant difficulty saw the greenback fall against the euro and sterling and looks set to prove the return of dollar weakness.

While the appetite for risk returned via short term speculators re-establishing carry trades, this will prove to be short lived as long term investors re-evaluate the situation and seek a safe haven for their money.

The long term trends remain in place, the Euro looks set to continue to strengthen against the dollar and a dovish Bank of England will ensure further strength of the single currency against the pound. A weekly close below 154.00 against the yen should mark the start of the next leg lower by the euro, as carry trade is unwinding and risk aversion returns.

Silver
Silver is trading at $15.91/$15.94 at 1200 GMT.

PGMs
Platinum was trading at $1547/1552 as per above (1200 GMT).
Palladium was trading at $362/367 an ounce (1200 GMT).

Note
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