the Fed Kill Gold?
Todd Stein & Steven McIntyre
The Texas Hedge Report
Jun 7, 2006
Courtesy of www.texashedge.com
So Bernanke got appointed and
gold bulls cheered. After all, this was the guy who threatened
to fight deflation by running the printing press while dropping
money out of helicopters. Gold going to four digits and never
looking back was a slam dunk, right?
Not so fast.
Central bankers are, above all else, politicians. And shrewd
politicians will do whatever is politically more popular at the
time. The moment Bernanke took office, the talking heads in the
media kept referring to Bernanke as needing to prove his "inflation
fighting credentials" before the rate hikes could end. So
whether speaking on Capitol Hill or elsewhere, the spin from
Bernanke was something like, "The economy is wonderful,
but we just need to make sure inflation doesn't get out of control."
As winter turned into spring, Wall Street liked Bernanke's tone
and the stock market marched higher. Bernanke even went as far
as to give clues that the rate hikes would be ending soon. Wall
Street really liked this and the Dow nearly rallied to an all-time
high. But in April, the new Fed Chairman started to mess up when
he told a CNBC reporter at a dinner party that the public had
been misreading him. A few weeks (and several hundred lost Dow
points) later, Bernanke admitted to Congress that he should've
been more careful when talking about monetary policy off the
record. He called it a "lapse of judgment" on his part.
At the same time the stock market was topping in early May, the
commodity markets were zooming out of control. Jumps of 5% in
one day in the prices of gold and silver reminded us of 1979.
All of the sudden, inflation became the talk of the town in Washington
and on Wall Street. Ah, what a difference four years make!
So where are we now? Stocks, real estate and commodities have
cooled off over the last several weeks yet most people still
expect Bernanke to hike rates again this summer. A hike in late
June would indeed solidify Bernanke's inflation fighting credentials
- or at least that is what the media wants you to think.
We like to take a much longer term view of things at the Texas
Hedge Report. Yes, the short term politics of the day call for
Bernanke to stop inflation. But in the long run of history,
the public cares more about full employment and rising financial
asset prices than they do about rising commodity prices. High
food and energy prices mean protests against oil companies accompanied
by dog & pony shows in Congress. High unemployment means
low approval ratings, revolution and upheaval. The Fed will hike
until something in the economy breaks - maybe we are starting
to see that today in the form of the equity and housing markets.
Bernanke says he watches the gold price everyday, so as long
as he is trying to be a tough guy, we may see gold continue to
take a pause. But eventually the employment situation will
worsen and public fears about rising commodity prices will be
replaced by fears of being laid off.
While we are not in the business of predicting monetary policy,
we wouldn't be surprised if Bernanke hikes once more and then
says he's done. We also wouldn't be surprised if the stock market
celebrated this news with a huge rally. That said, an end to
the rate hikes coupled with the Dollar-bearish macro fundamentals
mean that good things are in store for the precious metals. The
Fed may win this round against gold, but gold will eventually
win the fight.
June 7, 2006
Todd Stein & Steven McIntyre
Texas Hedge Report
& Steven McIntyre
For more information, go to http://www.texashedge.com.
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