Ben Bernanke continues to be one of the only economic voices of reason in the United States. The steady leadership he exhibited during the chaos of the financial crisis is now being carried over into the recovery. Bernanke isn’t letting the gold bubble affect his policy decisions, and you shouldn’t let the gold bubble affect your portfolio decisions either. Gold is economically irrelevant for the following reasons:
1. The pricing mechanism of gold is too easily manipulated by extremists. As a Republican, I’m uncomfortable being lumped into the same category as the Ron Paul crowd who think the world was a better place without the Federal Reserve, or a currency that allows monetary leaders to adjust to cycles. The majority of people who buy gold are the same people who think JFK was killed by the CIA and that 9/11 was a conspiracy. Governments aren’t perfect but they aren’t as bad as the gold guys want you to believe. Look at one of the biggest proponents of gold, Mr. Glen Beck. After years of ranting and raving about conspiracy theories and doing his part to spread the gospel of fear, he is getting fired from Fox News. None of his worst case scenarios have happened. The United States has not become a communist nation and the U.S. dollar still remains the global reserve currency. Those who boldly predict the demise of the United States as an economic leader do so from a foundation of fear rather than fact. Gold is the investment vehicle of fear and should not be treated as a reliable economic indicator. The Ron Paul / Glen Beck groupies can buy gold all day long, they can push it to $5,000/ounce if they want to, but that irrational buying behavior does not mean the U.S. economy is falling off a cliff, nor does it mean that inflation is out of control. It doesn’t mean much of anything, other than the fact that extremists are buying.
2. Gold is no longer a currency. No matter how badly the gold bulls wish we still lived with the gold standard, we don’t. This is 2011. Man has landed on the moon and there is no gold standard. I know that’s shocking to hear but it’s true. I recently heard a talking head on CNBC declare that he owns gold because it will still have value when our economy devolves into a barter system of exchange. When I heard that I had to rewind the TV out of disbelief! This guy thinks that gold bars will make him wealthy if the U.S. falls into such a Depressed state? Gold provides a false sense of security to investors who still think they’re living under the gold standard. Even more comical is that most don’t even own the bars of gold, instead they own gold ETFs that are priced in dollars! The ultimate irony is that extremists who own gold do so under the mantra of prudence and conservatism. Gold has no fundamentals. It is 100% speculative. The bubble could burst at any time and because it’s not a currency it would free fall without a bottom. That’s another reason why Bernanke stayed the course and will not allow gold prices to affect his policy decisions.
3. Gold prices are transitory. We know that oil prices are transitory -- or in other words temporary because of geopolitical concerns-- but the same is true of gold. This is a fad. This is what happens when the system allows a commodity to be priced independent of supply and demand. Anyone who tells me that the smart money is in gold has been suckered in by the typical snares of bubble rationale.
4. Bond prices, gold stocks, and core inflation suggest there is no imminent threat to the economy. Those who are investing in stocks of gold companies are frustrated because of the underperformance relative to the commodity. Why would this be? When you take a step back and analyze the bigger picture, like Ben Bernanke does, you realize that gold is a poor economic indicator because of the inherent pricing manipulation by extremist groups of investors. If inflation was really out of control it would be reflected by the big money in the stock market and in the bond market, but the yield on the 10 year treasury is at a healthy 3.3%. The Dow is at a near term high of 12,690. The frustration being experienced by gold stock investors is sending a message that short term gold prices are out of equilibrium. Remember that stocks are forward looking and price in the future before it happens. Freeport-McMoran (NYSE:FCX) is down from where it was three months ago. Barrick Gold is flat. Gold is at an all time high of $1512/ounce. This discrepancy is a signal from Mr. Market.
Fed policy is correct in its decision to remain focused on growth rather than a gold induced perception of inflation. Kudos to the Chairman for being the voice of reason.
Disclosure: I am short GLD.