Gold Bugs Rejoice: Bernanke's Back, Stronger than Ever

By Mike Conlon

In a bit a political sleight of hand, the Obama team moved boldly and swiftly to deflect attention from the unbelievably bad US national debt forecast by appointing “Helicopter” Ben to another term. There is much debate over whether or not this is the best move and rest assured there will be plenty of political grandstanding over it.

That aside, what can we expect from a Bernanke-led Fed going forward? Well, that depends on where you believe we are in the deflation vs. inflation debate. I personally have been in the deflation camp for some time now, but am now starting to come around to the inflationary side. Here’s why:

I wrote awhile back that I thought oil was a better hedge against inflation just because of the utilitarian value of it vs. gold. This sent the gold bugs into a tizzy. Well, I’m now firmly in their camp. It is now fairly obvious that the “transparency” that we were told to expect from the government and the market is all but a forgotten campaign promise. While there is no direct evidence of any government tampering, for some the numbers just don’t add up.

It appears as though we are going to see a continued, yet much more gradual decline in housing prices. The deflation experienced by falling housing prices will be offset by the rise in commodity prices and the costs of all other goods that aren’t big-ticket items, AKA inflation. In other words, every other product that doesn’t have a stimulus (cash for _______) associated with it.

This is how the administration is going to keep the promise to not raise taxes on the middle class directly. Instead, there will be a more insidious tax that affects everyone equally—higher inflation and higher cost of goods. Of course it will affect those with lower incomes more than those in higher tax brackets as the former has less income to spend. This means higher oil and gasoline prices, and I think this time we’re going to see the pop in gold price that the gold bugs have been waiting for.

The reason I think we’ll see gold move disproportionally higher than oil and other commodities is because gold is more of a tradable asset and is not something that the average citizen will be affected by. I would not be surprised for market in oil “act irrationally”, meaning there will be some outside force acting upon it (perhaps selling out of the Strategic Petroleum Reserve?) to keep prices lower in an attempt to keep the masses at bay.

Enter Bernanke. The unwitting fall-guy. With new powers at the Fed through the expansion of oversight. As a side note, is it wise to increase the responsibility of a body that was not able to perform their previous duties in a reduced role? He’s going to oversee the markets with a populist directive from the White House to keep prices as stable as he can.

Therefore, it is going to be the market vs. the Fed. And everyone knows not to fight the Fed. Once the powers that be (Goldman Sachs (GS) et al) are on board and everyone except the little guy knows that long oil is not the play, money will flow to gold. This is something that the administration can live with as well as the average citizen.

Not to mention the gold bugs, who’ll be dancing in the streets!

Original article

Comments

[yellowhoard:]

As the unofficial spokesman of the yellow hoard, I'd like to be the first to say well done President Obama..

Aug 27 02:45 PM

[Donald Ingram:]

With Benny and his 'economic jets' back at the helm of the Fed and his cronies whispering in Obama's ear, and a budget from fantasy-land, this bodes well for the price of gold.

Aug 27 04:12 PM

[Hot Richard:]

Amen. There is no need to pick just one hedge against inflation.

Not only shall you not battle the Fed, but nothing is safe from a wounded State. Economic theory will be bent at will, but luckily economic reality cannot be changed.

"The best way for me to defeat your misguided patriotism and damaging economic policies is to profit mercilessly from them."
-- Me

Aug 27 05:15 PM

[djj420:]

Again, as many people told you in the comment thread for the gold vs. oil article: there's no need to pick one or the other. If you're sure inflation is coming, a broadly diversified basket of assets that move inversely to the US$ is your safest bet.

Aug 28 08:54 AM

[auto44:]

There is talk of oil and gold, what about silver and nat. gas?

Aug 28 04:35 PM

[HA65MPH:]

Auto , hold all , gold -silver , nat gas !...metals , always in your hand ..no etf`s !

Aug 28 05:22 PM

[djj420:]

Holding nat gas in your hand would be one hell of a trick!

Aug 29 09:52 AM

[buybigtires:]

I like the silver play, as every source I read seems to think that it is far undervalued. Silver for a high profit play. Gold for stability, with more modest profits.

Sep 02 10:22 AM