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Gold Rally Surprised Bernanke

|Includes: SPDR Gold Trust ETF (GLD), GOLD

U.S. Federal Reserve Chairman Ben S. Bernanke said “I don’t fully understand movements in the gold price.”

Gold surging to a new high yesterday has rallied 30% from a year ago and has outperformed stocks, bonds and other commodities this year. “Other commodity prices have fallen recently quite severely, including oil prices and food price, so gold is out there doing something different from the rest of the commodity group." said Bernanke.

Gold and other commodities are sending contradicting signals on inflation. The inflation expectations remain low and the inflation signal isn’t confirmed by movements in other asset classes such as yields on Treasury bonds. Those yields tend to rise when investors worry about inflation, but they have been falling recently. This can be interpreted that many investors are using gold as a hedge against inflation risk and adding it into their portfolios as a less risky asset.

Gold bars

"There is a great deal of uncertainty and anxiety in the financial markets right now. Some people believe that holding gold will be a hedge against the fact that they view many other investments being risky and hard to predict at this point.” said Bernanke.

He cautioned investors by pointing out to the increasing government deficits and the current issues on Europe budgetary challenges but also provided some positive remarks on U.S. economy and mentioned that it has already made an "important transition" and expected that it would grow in a "somewhat faster pace" next year.

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