A Gift from the Fed (I was wrong)

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OK so I was wrong about the Fed cuts. I couldn’t believe it. The Fed cut deep and wide. I was expecting a quarter point cut and putting 10% odds on anything more than that. Instead the Fed cut the federal funds rate on overnight loans between banks and the discount rate charged to banks for emergency loans from the Fed, both by half a point.So I was wrong. Now that we’ve moved past that, let’s look at it for what it is. It is a gift. Here are the 2 gifts I received from the Fed to put it into perspective. I mentioned the effects of a Fed cut in an earlier post and now I’m reaping the rewards.

Gold me maties - Gold!

I had a sizable gold position going into this cut. I believed that the fiscal policies would lead us to the brink of recession. I reduce the odds now, but now I’m bullish on recession. Gold is seen as a hedge against inflation and that’s why the precious metal has shot up recently. It is up $16 today alone and is now at $760 for my coins. I purchased most of my position at $668/oz or below all in coins so I’m sitting on a 13.7% return in less than 6 months.

Foreign Investments

On August 20, I rightly said “If you get your CD now, and the dollar starts to depreciate you should get an added point or two from favorable currency exchange.”

When my last 3 month Iceland CD matured, I rolled it over. It is slated to mature in early October. I have been bearish on the dollar for some time. That’s why I had my gold and foreign CD investments. Look at the chart. The dollar dropped like a rock when the rate got cut. I’m going to make out well on the currency exchange side of this investment.

Now I hear Saudi Arabia may unpeg their currency from the dollar. This is great news for my CD!

“Saudi Arabia has refused to cut interest rates in lockstep with the U.S. Federal Reserve for the first time, signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East,”

-the U.K. Daily Telegraph

Why would they do this? To keep their currency demand equalized with the current exchange rate, Saudi Arabia or any other country for that matter would need to cut their own interest rates. Saudi Arabia already has high inflation. Such a move to keep the currency peg would add additional inflation to their economy. While countries in Europe that don’t have inflation issues may follow suit and cut rates, Asian countries such as India/China are less likely to follow. Both countries have inflation above 6%.

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