Economy, US Fed Cut and Gold

sagesurya · #1 24th January 2008, 07:16 PM

US Fed has cut interest rates by 75 bps. This might be seen as an attempt by the authorities to stem the fall in the US markets. At the same time it is an acknowledgment of the fact that “US is in a recession”. Many market participants expect a further 25 bps cut in Jan end meeting of the Fed.

Now this might not come as a surprise because Mr. Bernanke is doing his last bit to save the US economy. But history has shown as again and again that Govt action can do little to avoid the bursting of bubbles. The Fed is already behind the curve and one needs to watch as to how quickly can the US come out of this slowdown.

Currently US is facing the bursting of the credit bubble and it might take months (or may be years) for things to get back to normal. US economy runs on the “consumption story” but with US consumer getting into severe credit problems, things are looking very uncertain!

And if US goes into a deep recession, the news might not be so good for the global equities. The bull run in global equities which started in 2003 might finally come to an end.

I find it very difficult to digest the fact that India can remain “isolated” from a global recession. On top of it, if there is an economic slowdown Indian companies might be caught on the wrong foot because of massive investments being undertaken by the Indian corporate sector.

Imagine what will an Infosys do with those thousands of employees it is regularly hiring?

And do you think those employees shall be spending loads of money when they know that their jobs are uncertain?

In this uncertain world, things change pretty quickly . So wait and watch might be the best policy in the coming times. And be mindful of the RISKS of going too aggressive.

Gold might be better investment than the equities in the coming times. It might be a good idea to buy it on dips!

- SageCapital

manafa · #2 24th January 2008, 08:38 PM

There are some risks to gold too :

1. In down markets investors tend to liquidate their safe haven holdings like gold, driving the price of gold down.

2. Central Banks regularly dump their gold inventories keeping the price of gold down.

3. POG is heavily manipulated by holding companies

Having said that it still holds true that gold and other metals are safe bets. The price of gold in proportion to inflation is generally believed to be around 2100 US dollars or so, will it ever reach there is a matter of speculation. Most big brokerage houses are gauging the price to be around 1000 - 1500 by the end of 2009. Is this comparable to gains in equities specially in emerging markets its a matter of speculation. Its probably a good idea to keep a portion like 10% of your portfolio in gold.

sudoku1 · #3 24th January 2008, 09:19 PM

Quote:

Originally Posted by sagesurya

US Fed has cut interest rates by 75 bps. This might be seen as an attempt by the authorities to stem the fall in the US markets. At the same time it is an acknowledgment of the fact that “US is in a recession”. Many market participants expect a further 25 bps cut in Jan end meeting of the Fed.

Now this might not come as a surprise because Mr. Bernanke is doing his last bit to save the US economy. But history has shown as again and again that Govt action can do little to avoid the bursting of bubbles. The Fed is already behind the curve and one needs to watch as to how quickly can the US come out of this slowdown.

-

feds cut does not always mean a sunshine for our mkts everytime....
by cutting a massive premature 0.75
& still staring further.....its showing what goes abv a wall of worries for uncle sam.