Gold Calls Bernanke’s Bluff

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Gold and silver are calling Ben Bernanke’s bluff this week. Bernanke huffed and he puffed and he bluffed and he bluffed all month long about inflation. But the market realises that with America’s housing market mired in the muck, the Fed won’t be raising rates to defend the greenback this year.

In the futures market, the odds of a Fed rate rise dropped from 26% last week to 12% this week. The U.S. dollar continues to fall and gold was up US$6.60 in New York trading while silver hit US$17.34. Commodities have spoken. “Liar!”

Is there a big move coming in the precious metals? The Fed’s open market committee meets next week to discuss and set the price for America’s money. By then, we reckon traders will have a healthy scepticism that the Fed is willing or even able to defend the dollar with higher rates. Gold and silver have been treading water, technically speaking, for a while. Don’t be surprised to see new investment demand for precious metals as an inflation hedge.

Once you get people expecting higher prices, it’s hard to change their mind. Inflation is like a mental contagion. The Fed should know this. It started the epidemic with lower rates.

This isn’t good: “Australia’s mortgage arrears rate rose to a record in March as borrowers struggled to make repayments because of rising inflation and higher interest rates, according to Standard & Poor’s.”

That’s from the Age. “Payments more than 30 days late on so-called prime loans increased to 1.45% of mortgages used to secure bonds, from 1.37% in January, S&P said in a report.”

It’s not a tsunami of defaults yet. But as far as we can tell, many Aussies remain convinced housing prices never go down. Most are unaware that a mortgage bubble is responsible for rising house prices, some the demographic flim-flammery you get from the housing industry.

Is protein about to get more expensive? We haven’t covered the flooding in the mid-West of the US because it’s in the US, not Australia. But everything affects everything in the globalised world. If US corn production craters because of a lost crop due to the massive spring floods in America’s Corn Belt, there will be less corn. Less corn for ethanol. Less corn to feed animals like pigs and cows, which give us hungry humans are protein.

You can substitute wheat and rice for corn. But there’s no replacing Iowa. Oil rigs can be rebuilt after cyclones. If you lose an entire year’s crop or your farmland goes under water, it might be a good idea to stock up on staples. They’re probably going up in price. It shows you just how valuable farmland is as capital.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. This is probably a stupid suggestion, but what do you guys think of basing currencies on a 100% energy standard? No idea how it would work… a reserve of hydrogen perhaps?

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  2. Gold did the job very well until 1913 – and probably will be again soon judging by the way that central banks are again increasing their gold reserves.

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  3. Bernanke’s a puppet!

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  4. “But everything effects everything in a globalised world”.

    Well not necessarily.. if oil prices and shipping go up, wont the world localise again.. wont people go back to eating locally based diets.

    Are you actually recommending we stock up on staples due to floods in Iowa.. cant understand how you got to this as your concluding paragraph given the title actually. That was clever indeed.

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  5. Read the book, Confessions of an economic hit man by John Perkins, and you will see that our currency is already based on energy.

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  6. Dear Me,

    Energy commodities, and most commodities for that matter, unlike gold are too price unstable in the long term to be of reliance as a standard benchmark for exchange. You might just as well go the whole nine yards and go back to the days of bartering where it’s good riddance to standard altogether.

    Dear Barbara,

    Bernanke may be a puppet dim-wit but one must admit he IS very well groomed.

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  7. Tom, excellent point – bartering. Once people’s confidence in slips of paper wanes sufficiently we may indeed see a major return of bartering to the western world. Bartering plays a significant part in many small contries’ economics where money per se, is scarce.

    A cow for a litre of petrol anyone?

    Devoid of any other standard, confidence is the key. Bernanke is not helping revivie people’s confidence in money but doling it out by the billions.

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  8. Good point Dan. The Midwest floods are nature’s way of enriching the most productive farmland on earth, unfortunately man reaps the havoc of this cycle. Energy is big, but you can’t eat coal or oil. Inflation looks like a visitor with no plans on leaving soon.

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  9. If only there was a way to grow things underwater or in the ocean for people to eat. Then it wouldn’t matter how stuffed up, or short, or flooded the land got Maybe they could grow seaweed- thats a food, and you can even make noodles out of it. Australia is surrounded by water- couldnt we grow seaweed here then? And surely there must be some other kind of edible plant on the whole planet Earth that drinks salt water, then we could water it with ocean water, so the water shortage wouldnt matter either. I reckon they should start looking in the ocean for a type of food sullpy for humans, after all, they say that’s where humans originated from at some stage or another

    Reply

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