Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bernanke's Golden Dismount

Interest-Rates / US Interest Rates Jan 24, 2011 - 07:07 AM GMT

By: Michael_Pento

Interest-Rates There can be little doubt that Fed Chairman Benjamin Bernanke has been a very, very good friend to gold investors. However, some of those who have benefited from his largesse now fear that the recent selloff in gold indicates an imminent end to Bernanke's monetary high-wire act. Most assume that a cessation of the Fed's stimulative efforts, if it were to occur, would spell the end of gold's bull run. But a closer reading of Bernanke's economic philosophy and the Fed's own recent history, shows that once central banker begins a strenuous routine starts, it is very hard, if not impossible, for them to dismount.


It is widely believed that the unemployment rate, core inflation and home prices are the three key pieces of economic data that Bernanke and his Fed cohorts rely upon when formulating monetary policy. Although other data points, such as regional manufacturing surveys and the producer price index (which have rebounded significantly in some cases) attract some attention, they do not carry near the weight of the big three. With the unemployment rate remaining north of 9.4%, YOY core CPI inflation still less than 1% and the Case/Shiller Home Price Index down .8% from the year ago period, the Fed is in no mood to downshift. If anything, my guess is that Bernanke will step on the gas.

More importantly, in light of Bernanke's often stated conclusion that premature Fed tightening in 1937 and 1938 led to a prolongation of the Great Depression, even if the big three metrics were to show marked improvement, any future increase in interest rates will be moderate and held in abeyance for as long as politically possible.

Despite the fact that some economic data is improving, the foundation of the economy is getting worse. Consumers are now increasing their borrowing again--as evidenced by last week's number on consumer credit--and our government is now massively overleveraged. But leaving alone the deteriorating nature of these forward looking metrics, the Fed's own history provides unexpected good news for those holding tight to their gold positions.

The Fed began its last round of rate hikes in June of 2004 when Fed Chairman Alan Greenspan began a sequence of consecutive 25 basis point increases. The Maestro bumped rates 14 times before passing the baton to Bernanke in February of 2006, who continued the program with three more ¼ point increases. The combined efforts took rates from 1% to 5.25% in the span of two years. However, the tightening program did nothing to tarnish the luster of gold. Here's why.

Since the Fed increased interest rates very slowly from an extremely low level, money supply continued to expand during the long, slow, deliberate campaign of 25 basis point increases. From June 2004 through June 2006 the M2 money supply increased 9.3%, rising from $6.27 trillion to $6.85 trillion. Total loans and leases from commercial banks jumped from $4.61 trillion to $5.71 trillion during that same time period, an increase of 24%. As a result, over the time that the Fed's dynamic duo waged their phony war against the asset bubbles of the mid 2000's, the price of gold increased from $395 to $623 per ounce.

The truth is that increases in money supply and bank lending aren't curtailed very much by a Fed Funds target rate that is increased very slowly from a starting point that is decidedly below the rate of inflation. Currently, Fed Funds is decidedly below the rate of inflation, and is likely to stay there for some time. Therefore, investors need not necessarily fear a run on gold once Bernanke eventually lifts rates from zero percent...if he ever makes that decision.

In addition, investors should keep their eyes on the damage created by these ultra low rates. An enormously destructive housing bubble grew out 1% and 1.5% rates that were in place from November of 2002 through August of 2004. In our current round, the Fed has kept interest rates near zero since December 2008...more than two years! Why should we expect a different outcome this time around?

A key point to mention is that the credit crisis and collapse of the housing market were not caused by a the Fed bringing rates to 5.25%. Rather real estate prices simply went too high because rates were too low in the years prior. The low rates were the problem. And once home prices became unaffordable to most consumers, banks then became insolvent because millions defaulted on mortgages. After their capital became significantly eroded they were subsequently unable to lend.

The bottom line is that if Bernanke should ever attempt a "dismount" from massive monetary easing, investors should take solace not because he is likely to "stick" the landing, but because the exercise will likely be so futile that owners of gold should continue to shine.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free newsletter. Click here for more information.

By Michael Pento
Euro Pacific Capital
http://www.europac.net/

Michael Pento is Senior Economist and Vice President of Managed Products for Euro Pacific Capital. He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets.

Copyright © 2011 Euro Pacific Capital, Inc.

Disclosure: Euro Pacific Capital, Inc. is a member of FINRA and SIPC. This document has been prepared for the intended recipient only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in U.S. Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Data from various sources was used in the preparation of this document; the information is believed but in no way warranted to be reliable, accurate and appropriate. Euro Pacific Capital, Inc. employees buy and sell shares of the companies that are recommend for their own accounts and for the accounts of other clients.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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