Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bernanke’s Bind: One Chart Reveals Gold’s Next Move

Commodities / Gold and Silver 2010 Jun 13, 2010 - 03:49 PM GMT

By: Q1_Publishing

Commodities Best Financial Markets Analysis Article“I don’t fully understand movements in the gold price…”

That’s what Fed Chairman Ben Bernanke admitted this week. But if he were to look at what’s actually going on and every move he has made since 2008, he would understand the price of gold and see where it’s going next.

The Next Move for Gold

There’s no doubt the financial world is facing a lot of uncertainty. The failure of the Euro experiment, ballooning government debts and deficits, and a general economic malaise have all sent investors running into the perceived safety of corporate and government bonds (they seem safe now, but rising interest rates will destroy their value).

This flight to safety has actually been the greatest catalyst for gold prices. Investors piling money into bonds have kept long-term interest rates very low and Bernanke has kept short-term interest rates near zero. And low rates have been driving gold prices higher.

In the “Real” Reason it’s Too Early to Bet Against Gold we wrote:

The main driver for gold prices is real interest rates.

Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.

Right now real interest rates are negative. They’re below zero. And the impact of negative real interest rates is always the same, asset bubble.

And when there’s no predominant “story” like the Internet is going to change the world, China will take over the world, or the world is running out of oil, investment dollars inevitably turn to gold.

One Trend to Make Your Friend

Despite Bernanke’s confusion, this is what we’re seeing play out right now.

The chart below shows gold compared to the yield on the benchmark 10-year U.S. Treasury bond:

There’s a clear correlation over the long run: interest rates down, gold up.

And this trend isn’t about to change anytime soon.

Bernanke’s Bind

There’s just no politically feasible way out in the short-term. All of the stimulus money, welfare/unemployment spending, and other efforts to delay the inevitable debt liquidation have put Bernanke in a bind.

He has two options. He can keep interest rates low, allow the economy to trudge along dipping in and out of recession, and keep investors buying bonds. Or he can raise rates and induce a Volker-style recession to eliminate the capital misallocations.

The choices are killing the economic “recovery” or eliminating the forming gold bubble.

Regrettably, for long-term focused investors, the short-term, politically viable option of keeping interest rates low and hoping everything works out has been, is, and will be the preferred solution for a long time to come.

The Bubble Nears

There’s no way out of the gold bubble at this point. There has been so much money created, the savings rate has increased so much, and it will be nearly impossible to draw it all back in once credit demand returns and the money multiplier effect gets rolling.

Sure, government debts and deficits are getting all the headlines, fears over the tax increases looming next year kicking off the second dip of a double dip recession, and a general lack of faith in fiat currencies has contributed greatly to gold’s rise, but it’s extremely low interest rates that will keep the gold rally going for years to come.

It’s simple really. Bernanke may not get, but we do. And this situation has bubble written all over it so different rules apply.

Value doesn’t matter, price does. Housing, tech stocks, Asia, oil…they’ve all been the same. The more they went up, the more people wanted them. Gold is no different. No one wanted gold at $300 or $500 an ounce. There has been considerably more interest at $1,000 an ounce. The record run-up to $1250 an ounce has only compounded demand. As the trend continues, gold demand will increase exponentially as it rises to $1500, $2000, and beyond.

Unless you’re expecting a bit of honesty and courage from politicians, buy gold and silver for safety and buy undervalued gold and silver stocks for superior gains. Check out our free gold report (get it here) for where the best values are in gold stocks.

Good investing,

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2010 Copyright Q1 Publishing - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


13 Jun 10, 20:44
Bernanke And Gold

They say that central bank presidents hate gold, but I wonder how much gold Big Ben has stashed away.

14 Jun 10, 12:07
Gold is not in a bubble



When it comes to gold, it is clear that gold is not in a bubble, because governments do not intervene in markets to make gold price higher. On the contrary, they throw everything (central bank sales, leasing, financing academic and media propaganda against gold, paper gold instruments, bribery, legal tender laws, demonetization, tying government debt and goodwill to paper currency etc.) onto it to suppress its price.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in