Fed rate cut fuels dollar slide

Oil and gold prices hit fresh record highs Wednesday while the dollar struck a new low after the Federal Reserve cut interest rates by a quarter point to 4.5%.

But will another rate cut turn out to be good or bad for the economy over the long-term remains the $64,000 question.

Gold prices have already surged 20% and oil is up 30% since mid-August, spurred by a half-percent interest rate cut in September intended to pump billions of dollars into financial markets to ease a liquidity crisis.

"The Fed is driving the dollar down to save the housing market, but this is just a quick-fix. By cutting rates now the Fed has bowed to Wall Street pressure despite today's report of stronger-than-expected growth in the last quarter," says author and CEO Craig R. Smith.

"The Federal Reserve Board acted 'like a bartender' in lowering interest rates and its actions are contributing to a stock market bubble in the U.S.," said Marc Faber, publisher of The Gloom, Boom & Doom Report to Bloomberg.

With the world's eyes focused on the meteoric fall of the U.S. dollar this year, it seems odd to many economists that the Fed would risk a dollar crash for the sake of cheering Wall Street and helping debt-burdened Americans make their mortgage payments as ARMs payments readjust upward.

Jim Rogers, chairman of Beeland Interests Inc., told Bloomberg he is shifting all his assets out of the dollar and buying Chinese yuan "because the Federal Reserve has eroded the value of the U.S. currency."

According to a recent Merrill Lynch note to clients, "We're in the beginnings of a global readjustment that will end the dollar's dominance as the 'gold standard' currency for the world's economies. The dollar is likely entering a long, slow decline - followed by a crash," reports Financial Times.

$800 gold still cheap?

In reality gold is just over one third of the way up toward reaching a true new high. Using the official CPI inflation adjuster $750/oz. gold in Sept. 2007 equates to $297/oz. gold back in 1980. Rather than being near a market top, gold remains the buy of a generation.

"In relation to oil, gold prices are still cheap," says Mr. Smith. Gold prices have risen to a 28-year nominal high, but still must top $2,100 an ounce to exceed the previous 1980 high of $850, after adjusting for inflation," says Mr. Smith.

"Gold is still cheap compared to $95 oil, which is already near its inflation-adjusted price peak of $38 a barrel in 1980."

Gold is entering a new investment driven phase as gold market drivers "tend to oscillate between bouts of eastern physical/fabrication demand and western investment demand," according to Citigroup's research.

"Gold is headed to between $1,000 and $2,000 an ounce in the next five years. There's an 80% correlation between gold prices and oil prices. Gold usually trades at about ten times the price of oil, so with oil at $80 a barrel, we expect gold should be priced at about $800/oz.," said Frank Holmes, Global Investors CEO.

"Once gold clears $805, that means $882-$889 and then on to $1050. It does not matter if it is next week or next month. It is coming as the price of gold makes its way to $1650," says Jim Sinclair of JSMineset.com. (See Who sees four-digit gold?)

"Once gold clears $805, that means $882-$889 and then on to $1050. It does not matter if it is next week or next month. It is coming as the price of gold makes its way to $1650," says Jim Sinclair of JSMineset.com.

"Americans will soon begin feeling the impact of the rising cost of living that reflects a dollar that is slowly but surely becoming an 'I-O-U Nothing'," says Mr. Smith.

Mr. Smith has been warning investors since 2001 that all is not what it appears to be on Wall Street. Stocks are supposed to represent a store of value, like our currency, which should grow in value over time. But today investing in most stocks and currencies is nothing more than a crap shoot.

To help Americans understand why $800 gold is still a good value, Mr. Smith is offering a free copy of his "GOLD 101" 25-minute DVD which promises to teach viewers "everything they need to know about gold in about a half-hour."