Gold Is Bernanke’s Conundrum

In December, 2009, Federal Reserve Chairman Ben Bernanke insisted that gold’s surge was not signaling increased inflation expectations because it was simply following along with the general rise in commodities. Now that gold stands head and shoulders above the commodity pack, Bernanke is expressing his bewilderment at gold’s strength. Gold is still not a signal of rising inflation expectations because the data show no current inflationary pressures. Let’s call this Bernanke’s conundrum in honor of former Chair Alan Greenspan’s professed bewilderment with the persistence of low long-term rates even as the Fed dished out short-term rate hikes in bite-size morsels.

Bernanke claimed the following during Q&A following his Wednesday testimony to Congress (2:09 on NightlyBusiness Report video for June 9, 2010):

“Gold is out there doing something different from the rest of the commodity group. I don’t fully understand movements in the gold price, but I do feel that there is a lot of uncertainty and anxiety in financial markets right now; and some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.”

So, when gold is just another commodity, Bernanke is confident he understands gold. But when it diverges to the upside and makes new highs, it becomes a conundrum. Bernanke can certainly point to current inflation numbers and insist that buyers of gold are simply “uncertain and anxious.” His claim that other investments appear “risky and hard to predict” to other people is useless. We would all be rich if investing were certain and devoid of risk (of course, you could argue that near zero interest rates is as close to simulating such a scenario as possible!).

Bernanke cannot speculate much further on other fundamental reasons for gold’s rising popularity: more and more people are looking into the future and realizing that many Western governments can only afford to pay (service?) their tremendous loads of debt by printing money. Maybe not today or tomorrow, but eventually, the world will be awash in even more massive amounts of paper. This is always an available option in a world of near-zero interest rates.

Anecdotally, it still seems that for every gold bull there is at least one skeptic insisting that gold is in a bubble and is not and has never been a hedge against anything. I say stay focused first on the real bubble: government debt.

Be careful out there!

Full disclosure: no positions

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