Interest Rate Cuts and Higher Gold Price a Matter of Time

Today, we open the paper. We connect to the Internet. We look to see what has happened in the financial world.

Nothing much.

Stocks rallied last week. The dollar fell.

The old buck hit a new record low against the euro. Against gold, it fell US$16.50 on Friday alone – down to US$787 per ounce (which is to say, the price of gold rose).

Analysts blamed the fall on a rate cut they said was likely this week.

What more can we say about this? Will the Fed cut rates? Will the dollar fall further? Will gold hit US$800? US$900…or more?

The answer to all these questions is, “Yes, of course.”

It is the timing we are uncertain about.

It makes us nervous to see so many negative comments on the dollar. Yes, the greenback is going down. But things never tend to work as neatly as we expect. It’s hard to believe that speculators haven’t already caught on to the dollar’s fall. It’s hard to believe they haven’t gotten ahead of it.

Most people, however, are long the dollar…not short. They’re holding US dollar assets because they believe they can earn a positive, safe return on them. Or because they earn dollars. Or because they spend dollars. Many speculators borrow yen or Swiss francs, exchange the money for dollars, and buy dollar assets. If the dollar falls, they lose money. But they’re convinced the dollar will go back up. In fact, a Bloomberg survey tells us that the median forecast for the dollar is that it will soon return to US$1.40 per euro, rather than today’s US$1.43.

How do they remain so bullish? US stocks are up this year…but they are still among the worst performing in the world. The dollar is down 8% against its major trading partners. And now the foreigners are nagging us about our subprime problems…and how we’re a threat to the entire global economy.

There are always surprises. It would be a surprise to many to see the dollar rally. But it might be even a bigger surprise to see it collapse. Among all the forecasts we’ve read almost all call for a gentle decline of the US currency…leading to strong exports from America to the rest of the world. But what if the big surprise was that the dollar suddenly dropped to US$1.50 per euro…and the price of gold shot up over US$1,000?

We’re not predicting it, dear reader. Many times we’ve tried to look into the future, but we’ve never got the hang of it. So, we just take it as it comes along with everyone else.

But what a shock it would be!

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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