Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Central Banks Inflation Quandary As Gold Prices in More US Interest Rate Cuts

Interest-Rates / Inflation Oct 04, 2007 - 12:32 PM GMT

By: Christopher_Laird

Interest-Rates Best Financial Markets Analysis ArticleWhen the Fed cut the discount and target rates by .5% they tied the hands of some other central banks who have been wanting to raise rates. From China, to the Middle East, to the EU and then Japan, each has reacted in its own way as they find they have to take into serious consideration what the Fed does.


And, as the US economy continues to weaken, prospects for further US rate cuts are in the cards, though not guaranteed on the next Fed rate decision. In fact, there is a bit of a debate going on again, that the Fed may actually pause on the next go, seeking to control damage to the USD. An interesting caveat here is that gold has already started to price in more likely rate cuts. If that does not happen, gold will drop a bit after the next Fed rate decision.

But, getting to the more current issue, the Fed's cuts are having interesting reactions from other major central banks. Overall, a weakening interest rate environment world wide is gold friendly. (A caveat here is that many interest rates are actually rising, such as Libor rates which are resisting central bank easing. Libor rates are used to set credit card, home loan, and auto loans in the US and elsewhere.)

EU

First, the EU/ECB has been wanting to raise interest rates, as inflation becomes a bit over 2% in the EU. But, when the Fed cut, the Euro soared again. This makes it difficult for the ECB to raise rates, because the EU nations do not like the present strengthening of the Euro one bit. So far, in spite of inflation rhetoric aside, the EU has had to pause in rate hikes, lest the Euro rise more to a real pain level of 1.50 USD. This is inflationary and gold friendly.

Middle East

The Mid East oil nations are flush with cash from high oil prices, and the extra foreign exchange building up there is causing asset and stock bubbles. They have stated that they are not going to be tied to rate cuts as the Fed has cut. They need to raise interest rates to combat the trade surplus pressures on their markets. But, if they do raise, there is more movement into their currencies. So it's kind of a no win battle for them. Their primary problems are huge trade surpluses causing huge money growth there that is hard to control, as it has to be sterilized into their own currencies then finds its way into their local markets. The nations with strong trade surpluses can resist US rate cuts more easily.

Japan

Japan is seeing some deterioration in their economy, and there is some concern that deflationary pressures remain. The last thing Japan needs is a weakening US economy. The way they got a handle on their deflation of the last ten years was to export their way out of it, as they found it impossible to generate economic growth domestically during that period. The trouble is, if the US slows, that engine of growth for Japan slows down. The BoJ states they do not intend to hike rates at the present. This continues the easy money from Japan which will continue to act as a central bank of the world as people borrow money at 1% or so and throw it into markets. Gold will like that. Gold has risen quite a bit in the Yen.

China

China stated recently that they do not intend to be handcuffed by US rate cuts, at least not now, as they vie with a huge stock bubble. Their economic growth is still at well over 10%. They also have trouble controlling excessive lending, as private banks (underground banks) continue to lend without any regulation, as Chinese flock to various bubbles there. In addition, their interest rates around 6% are way too low to slow an economy supposedly growing at a 12% rate, and has money growth in the range of 18% as $billions of trade surplus come in and have to be washed into local currency. China has out of control money growth because of this. See Richard Duncan's seminal book, The Dollar Crisis, on how USD trade surpluses lead to out of control domestic bubbles and crashes, and how impossible it is to control that phenomenon. The Middle East has many of the same issues with excess foreign exchange coming in and causing bubble pressures.

All of these pressures of a weakening interest rate environment led by the US (central bank wise) lead to bullish gold pressures. This is especially true considering that lower interest rates by the Fed and the BoJ (easy money exhibit number one for the last ten years) leads to excessive money growth world wide, not just for their own currencies.

Competitive devaluation

As one major nation cuts interest rates, their currency falls, and that puts pressures on their trade partners. A perfect example of this is the USD/Euro situation. Prior to the US cutting the discount and target rates by a half percent, the USD was in the range of the 130s to the Euro. Right after, the rate shot up to the 1.40s and that is a pain threshold for the EU. Already, their export prices are rising. The governments and financial institutions and their industries are screaming for relief. As a result, there is significant pressure for the EU to at least halt their efforts to raise interest rates (Euro bearish). This is a manifestation of competitive currency devaluation forces. As the USD falls below 80 on the USDX (US dollar index basket of currencies heavily Euro weighted) the Euro rises unless the EU can reduce interest rates along with the USD.

China has similar problems with inevitable Yuan/RMB strengthening if they do not cut rates along with the US (they cannot, inflation is getting out of hand there).

By Christopher Laird
PrudentSquirrel.com

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in