Bernanke's Delusion is Good for Gold and Silver Prices

Gold and Silver Prices should benefit from continued loose monetary policy...

AT FIRST I thought US Federal Reserve Chairman Ben Bernanke was just being deceitful when he denied the existence of inflation – but now I'm beginning to think he's simply delusional, writes Martin Hutchinson, contributing editor to Money Morning.

Anyone who watched or listened to Bernanke's October 4 congressional testimony must have reached the same conclusion. 

"Persistent factors continue to restrain the pace of recovery," Bernanke said. Then the Fed Chairman promised to consider yet more stimulus "to promote a stronger economic recovery in a context of price stability." 

The irony, of course, is that we don't actually have price stability, but Bernanke refuses to believe this – thus the added stimulus. And that says nothing of the fact that the first $2 trillion of "stimulus" did little or nothing for the overall economy.

This is the same kind of delusion that led the Fed Chairman to proclaim in 2007 that the "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." 

So, with a delusional central bank chairman, an anemic economic recovery, and every indication that prices across the board will continue to soar higher, there's really only one place to put any loose change you have lying around: gold and silver.

Gold and commodity investments are attractive for two primary reasons:

• First, global monetary policy was – and still is – very stimulative. Commodities, especially gold, tend to do very well when interest rates are well below inflation.
• Second, rapid growth in emerging markets has created a new wave of middle class consumers. Those new buyers are increasing demand – and therefore prices – for industrial commodities.

Of course, following the market turbulence of the past few months, the picture has changed somewhat. While growth in China and other emerging markets remains quite rapid, it appears to be slowing a bit. That has dented demand for industrial commodities. Prices have dropped as a result. Copper, for example, has fallen to about $6,900 per metric ton, from more than $10,000. However, unless the emerging market economies go into a full-blown recession – and I don't expect they will – I would anticipate some recovery here.

On the other hand, monetary policy has gone in the opposite direction – becoming even more stimulative. Bernanke intends to keep short-term interest rates near zero until mid-2013 and he's undertaken "Operation Twist" to bring down long-term interest rates. Both of these measures have increased monetary stimulus at a time when inflation is already running close to 4%. 

That brings us to this week, when Bernanke decried the progress in the economy and indicated that the Federal Open Market Committee (FOMC) would consider even more monetary stimulus – even though three of the group's members are solidly opposed to the idea. 

So far the only thing the Fed's loose monetary policy has succeeded at doing is pushing gold and Silver Prices steadily higher. 

Gold has risen by more than 30% this year, and silver at one point in April was trading 300% higher than it was a year earlier.

These metals have stumbled lately, but with over-expansive monetary policy still intact, they are likely to experience a strong rebound. 

Remember, it's not just Bernanke: The European Central Bank (ECB) also has stopped raising interest rates because of the Eurozone's problems. And the Bank of England (BOE) has indicated that it may well drop rates from their current 0.5% level – even though British inflation remains around 5%. 

The undeniable result will be a renewed surge in gold and Silver Prices, meaning the present pullback is an outstanding buying opportunity. 

If gold matches its 1980 peak adjusted for inflation, it will hit $2,500 an ounce. If it matches its 1980 peak adjusted for the world economy's growth since then, it will hit $5,000 an ounce. 

Similarly, if silver were to match its 1980 peak adjusted for inflation, it could climb as high as $150 an ounce.

These are not unrealistic targets. As in the late 1970s, the world's monetary authorities are determinedly trashing the value of paper money and forcing rational investors to look for an alternative.

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