Going for the Gold

It seemed as though everyone with functioning financial sensibilities was aware of and understood the many factors driving up gold. Everyone, that is, except America’s top financial expert:

Bernanke Puzzled by Gold Rally

Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk.

In this case, it might instead be a risk against risk broadly. Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes…

“I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky … ones like gold. (Wall Street Journal, 9 June 2010)

Here he was, Fed Chairman Ben Bernanke, the man running the money-printing machine admitting, “I don’t fully understand movements in the gold price.” What was it about the climb in gold (accurately predicted by Gerald Celente back in 2001), that “puzzled” Bernanke and that he did not “fully understand”?

Could gold fever have a connection to the Fed-initiated record-low interest rate policy that began in 2001 and would flood the world with cheap money? Could it have anything to do with the $13 trillion lent, spent and guaranteed by the US and the Fed in stimulus, bailout and rescue packages?

Or could the rush to gold be in any way related to the rising levels of US debt? Public debt, standing at $13.6 trillion in 2010, had more than doubled since the interest rate orgy’s onset in 2001, while the debt-to-GDP ratio had risen from 57.4 percent to 93 percent. Debt was forecast to reach nearly $20 trillion by 2015, putting the anticipated ratio of debt-to-GDP at an estimated 102 percent.

Or could Bernanke’s bafflement over rising gold prices be attributed to an inability to acknowledge the strong probability of sovereign debt defaults and the implications of an imminent commercial real estate collapse?

Why should it be a story in the WSJ that Bernanke was unable to grasp the factors driving up the price of gold? In November 2007, as America was entering the Great Recession, Bernanke predicted the US would not enter into recession. In 2008, with America deep in recession, Bernanke denied America was in recession. Of course he wouldn’t understand what was driving up gold prices!

If economic expansion is strong enough to cover the interest on debt, the debt-to-GDP ratio is not critical.  But in the US, with debt ballooning, interest rates poised to rise and economic growth weak, the once unthinkable prospect of America defaulting on its international financial obligations became thinkable. (The Maastricht Treaty, which established criteria for membership in the European Union, mandated a debt-to-GDP ratio no higher than 60 percent for would-be members.)

Not only was Bernanke, the former Princeton Professor of economics, unable to tabulate the economic data adding up to a gold rush, he appeared unable to factor in or even acknowledge the powerful outside-the-economic-box components (mounting social unrest, escalating, treasury depleting wars and probable terror strikes) that made gold so compelling.

But no matter how self-evident the drivers behind the gold rush, if the Fed chief couldn’t see them, how could anyone else?

When Gerald Celente called the beginning of a “Gold Bull Run” in 2001, with gold at $275 per ounce, Wall Street stock hucksters called it nonsense. In the decade since Celente’s prediction, gold has risen nearly 500 percent, while, according The Wall Street Journal, “The Standard & Poor’s 500 stock index has fallen at an annualized rate of 3 percent a year over the past 10 years, including dividends and controlling for inflation.”

Regards,

Gerald Celente
for The Daily Reckoning

[Editor’s Note: The above essay is excerpted from The Trends Journal, which is published by Gerald Celente. The Trends Journal distills the ongoing research of The Trends Research Institute into a concise, readily accessible form. Click here to learn more about and subscribe to The Trends Journal.]