-- Posted Sunday, 5 October 2008 | Digg This Article | Source: GoldSeek.com

By: Peter J. Cooper

The charter of the Federal Reserve allows its chairman to make rate cuts of up to 0.5 per cent at his discretion in between official meetings to set rates. Expect such a cut as soon as tomorrow morning.

The paralysis of the banking system is reaching boiling point with inter-bank rates soaring and the true cost of borrowing prohibitive for corporates. This will cause a chain reaction of financial and business failures if it is not quickly dealt with and Fed chairman Ben Bernanke has no illusions about what is at stake.

He will also have observed the poor response on Wall Street to the final passing of the $700 million bail out package. By delaying this law the Congress may have undone its main purpose: restoring confidence. Cutting the Fed base rate is one more card to play in this increasingly desperate game.

We should expect the Bank of England and the European Central Bank to follow suit - although the ECB left rates on hold last week and could take its time as usual.

That ought to mean a weakening of the US dollar - and this can be afforded after recent gains for the greenback. Gold will also rise as the dollar falls, and with it silver.

Precious metals are safe haven assets, particularly as currencies lower interest rates and enter a period of competitive devaluation. What is the best currency in a devaluation cycle? It has to be the one in fixed supply, and that can only mean precious metals.

Who cares about zero dividends on precious metals when devaluation is undermining currencies that pay low interest rates in any case. Perhaps that is why people are queuing in the streets of London to buy gold and are pulling money out of the crumbling banking system.

Peter J. Cooper

http://arabianmoney.net/

-- Posted Sunday, 5 October 2008 | Digg This Article | Source: GoldSeek.com

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