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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 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
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.


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

A BULL MARKET IS A “NATURAL EVENT” DRIVEN BY FREE MARKETS.

A BUBBLE IS AN “UNNATURAL” EVENT DRIVEN BY GOVERNMENT.

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.


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