Ben Bernanke Lowers Price of Holding Gold With Interest Rate Cuts

Psst...want to know how to build a small fortune by investing?

Start with a big one!

But if you don’t have a big one, the best you can do is to try to hold on to the small one you make in your business or your career. The average rate of return over the very long-term is only a couple percentage points higher than the inflation rate. Put in a couple of stock market crashes...a couple of bankruptcies...a couple of bad decisions...and a couple of crooked investment managers, and you’re lucky to end up with about as much as you had when you started.

There are times when the investing world becomes so dangerous that the most likely rate of return for the average investor will be negative. That is a good time to hold gold; your rate of return will almost certainly be better than actually investing! Gold is a hedge against the unknown...against risks...against error. But like any insurance, it costs money. When you hold gold, you give up the yield you would otherwise get from stock dividends or bond coupons. Now that Bernanke has cut short-term rates, the cost of holding gold has gone down.

Is now the time to buy gold? The money supply in the United States is rising at a rate nearly five times the growth of the economy itself. The Fed, claiming that inflation is now under control, has just cut the price of credit to member banks by half a percentage point. The economic explorer has to rub his eyes and look twice; he can’t quite believe it. How can inflation be under control when prices for key commodities – notably the keyest commodity, oil – are at record levels? He doesn’t have an answer, but he can put two and two together. Whatever kind of ‘flation’ the Fed has been cooking up, we’re going to get more of it. So put on your best bib and tucker, dear reader.

Central bankers – both in the United States and in Britain – had two battles on their hands. They could continue the fight against inflation...holding rates steady, or actually increasing them. Or, they could do an about-face, and fire away at the kind of flation with a ‘de’ in front of it.

“Which way is scarier?” asks the Wall Street Journal .

“It depends,” is our answer. If we were the central bank of China or Japan – with hundreds of billions of dollars in our vaults – we’d probably think the war had taken a nasty turn. Instead of helping to defend our number one asset, the Fed and the BOE are now working to destroy it.

If, on the other hand, we owed hundreds of billions of dollars to Asian creditors, or had a big position in the yen carry trade, or a house in Florida that we couldn’t quite afford – we’d give the latest Fed move a big “hoorah!”

Here at The Daily Reckoning , we give it neither thumbs up...nor thumbs down. We sit on both our thumbs...buy gold...and wait to see what happens next.

Bill Bonner
The Daily Reckoning Australia

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