JUNE 9, 2010, 12:03 PM ET
Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on
top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the
U.S. Gold is seen by many investors as a hedge against inflation risk.
In this case, it might instead be a risk against risk broadly. Mr. Bernanke
notes that the inflation signal isn’t confirmed by movements in other asset
classes. Yields on Treasury bonds tend to rise when investors worry about
inflation, but those yields have been falling recently. Inflation expectations
as measured in Treasury Inflation Protected Securities (TIPS) markets
remain low. And other commodity prices are falling. Gold is breaking
records, but copper prices are down 17% so far this year.
“I don’t fully understand movements in the gold price,” Mr. Bernanke
admitted. But he suggested it might be another example of investors fleeing
risky assets and flocking to assets that are perceived as less risky, not only
Treasury bonds, but also ones like gold.
Bernanke also defended the stimulus in his cautious testimony as a temporary measure to boost the economy, but warned of
continuing deficits.
Bloomberg News
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This shows how un-brilliant our top Economist truly is. By his assessment, all the normal indicators don’t show any reason for gold to rise. He cites the drop in treasury yields and the low price of copper as counter indicators. The thing he doesn’t understand is explained by Milton Friedman in his book Money mischief…A simple explanation is that money today has no hard commodity backing it in any country in the world. The long explanation goes like this.
“The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody’s experience they have value… The United States could barely operate without a common widely accepted medium of exchange… yet the existence of a common and widely accepted medium of exchange rests on a convention: our whole monetary system owes its existence to the mutual acceptance of what, from one point of view, is no more than a fiction.” Milton Freidman, Money Mischief
Bernanke doesn’t realize that the fiction is eroding and our faith in the value of the $$ is faltering. People, like myself, fully expect the dollar to become worthless if the US continues on its current fiscal path. This means we all need to have some form of currency which can be traded in that event. Silver and Gold are the most accepted, hence the increase in gold prices.
Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on
top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the
U.S. Gold is seen by many investors as a hedge against inflation risk.
In this case, it might instead be a risk against risk broadly. Mr. Bernanke
notes that the inflation signal isn’t confirmed by movements in other asset
classes. Yields on Treasury bonds tend to rise when investors worry about
inflation, but those yields have been falling recently. Inflation expectations
as measured in Treasury Inflation Protected Securities (TIPS) markets
remain low. And other commodity prices are falling. Gold is breaking
records, but copper prices are down 17% so far this year.
“I don’t fully understand movements in the gold price,” Mr. Bernanke
admitted. But he suggested it might be another example of investors fleeing
risky assets and flocking to assets that are perceived as less risky, not only
Treasury bonds, but also ones like gold.
Bernanke also defended the stimulus in his cautious testimony as a temporary measure to boost the economy, but warned of
continuing deficits.
Bloomberg News
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This shows how un-brilliant our top Economist truly is. By his assessment, all the normal indicators don’t show any reason for gold to rise. He cites the drop in treasury yields and the low price of copper as counter indicators. The thing he doesn’t understand is explained by Milton Friedman in his book Money mischief…A simple explanation is that money today has no hard commodity backing it in any country in the world. The long explanation goes like this.
“The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody’s experience they have value… The United States could barely operate without a common widely accepted medium of exchange… yet the existence of a common and widely accepted medium of exchange rests on a convention: our whole monetary system owes its existence to the mutual acceptance of what, from one point of view, is no more than a fiction.” Milton Freidman, Money Mischief
Bernanke doesn’t realize that the fiction is eroding and our faith in the value of the $$ is faltering. People, like myself, fully expect the dollar to become worthless if the US continues on its current fiscal path. This means we all need to have some form of currency which can be traded in that event. Silver and Gold are the most accepted, hence the increase in gold prices.
This entire concept becomes really interesting when you consider the end of the Bush Tax Cuts. The Death tax will go from 0-40%, capital gains will return to 20%, top tax rate will go to 39.6%. When this is combined with the nearly doubling of our monetary supply, we are talking significant inflation and a double dip recession. Strap in, its going to be a bumpy ride in 2011
