Federal Reserve Slashes Interest Rates Again… Why You Should Go For Gold, Commodities, And Financials
Wednesday, December 17, 2008- Special Edition
by Karim Rahemtulla, Investment Director, Smart Profits Report
Dear Smart Profits Report Reader,
No surprise from the Federal Reserve yesterday afternoon.
Well, not really.
Bernanke & Co. did as everyone expected them to do and slashed U.S. interest rates. But it was the size of the cut - from 1% to a record low of 0.25% that caught some folks off guard.
You shouldn’t be one of them - at least not if you took our advice to buy gold stocks, as we’ve suggested for some time now.
If so, you’ve likely enjoyed double- and triple-digit returns since September. And there’s more to come for gold. But be careful. The price of gold and gold shares will not move up in a straight line. Here’s why…
Massive Stimulus = Three Huge Rallies In The Next 12 Months
Over the next few months, the talk will be of deflation, not inflation. Actually, what people should be talking about is “disinflation.” That means the slower growth in prices, not necessarily the technical definition of deflation, which is when prices actually fall and are expected to fall further.
Monetary policy does not have immediate effects. But the Fed’s new policy to buy any and all securities by way of its massive balance sheet should act as a major stimulus to the market by mid-summer.
Add to this a massive stimulus package, which will be announced on January 21, as soon as President-elect Obama is behind the desk at the Oval Office… and you have the makings for three major rally points in the coming 12 months.
Rally #1: Gold and silver
Rally #2: Commodities
Rally #3: Financial and insurance stocks
Let’s see why…
Gold
Gold will rally because of the very simple fact that the Fed and governments around the world cannot print so much money without debasing their respective currencies.
This is not idle conjecture. It will happen.
Paper is infinite… gold is not. And the balance could send gold - and gold shares - to the moon in coming years.
What should you do?
Wait for the inevitable pullbacks in gold and gold shares to load up. We’re talking about companies like Goldcorp (NYSE: GG) here.
These pull backs will come when the numbers that come out in the coming months, which will continue to point to more slowdown. For more on this, please refer to our earlier article on gold.
Remember, monetary policy takes time to trickle down, usually 6 to 9 months.
Commodities
Commodities will rally on the back on infrastructure spending and demand for oil and gasoline, which will be ignited by government policy and the increased consumption by consumers as low prices act as an incentive to use more oil.
What should you do?
Selectively invest in infrastructure shares and to buy oil and oil related companies. In this area, we’re looking at General Electric (NYSE: GE), which also just reaffirmed its 2008 profit forecast and 2009 dividend payment plan, as well as refiners like Tesoro (NYSE: TSO).
Financials
Finally, financial stocks will benefit (those that have survived, of course), as the government buys more of their assets, thus cleansing their balance sheets and income statements in future quarters.
What should you do?
In bailing out Citigroup (NYSE: C) shareholders, the U.S. Treasury sent a strong signal that it will not allow major failures and it will not penalize shareholders either.
Banks will also benefit from the spread between their borrowing costs at the Fed window, which will be low for some time to come, and the rate at which they lend the money out (when they start lending again in earnest).
Don’t expect great results in the first or second quarter, but look for opportunities to buy financials on major dips. Consider re-financing your mortgage, too, as you may see sub-4% mortgage rates in the near future.
The Smart Profits Bottom Line
The moves by the Fed and foreign governments are unprecedented.
They are lowering interest rates and printing money - not just to stimulate economic growth, but also to fight off a Depression.
Will they succeed? Most likely, yes. And that means you’ll want to be on the right side of the reflation that will occur in the months and years ahead.
At the Xcelerated Profits Report, we’ve taken positions in all three of the above-mentioned sectors in order to grow wealth. So can you - and we’ll show you how to do it like the pros do. Faster and with less risk than the regular crowd. For more information, click here.
Best regards,
Karim
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