No one is sure where our market is going. Not even Federal Reserve Chairman Ben Bernanke.
This Friday, Bernanke gave a small boost to the market by vowing to do whatever it takes to revive the shaky economy. He reassured Wall Street that the central bank will act if “unexpected developments” cause the recovery to falter. This brought the Dow back above 10,000.
You can find the full speech by clicking HERE.
Bernanke confirmed again that the deep economic contraction had ended, and that we are seeing broad stabilization in global economic activity and the beginnings of a recovery.
Although the markets took a sigh of relief, albeit a very small sigh, this isn’t the first time Bernanke has made reassuring statements about the economy. So while he sees no double dip, let’s not forget that he also didn’t see a housing bubble before it popped.
But we can’t blame him. We have to remember that his words play an extremely powerful role in the reactions of the market. If his talks are overly negative and pessimistic, his words alone have the ability to cause another economic collapse. And no one wants that.
So let’s cut the guy some slack. Bernanke is a genius. While we can all talk about how to make things better, let’s be real. The majority of us are not as smart as he is (this guy scored 1590 out of 1600 on his SAT.) Despite his smarts, being the Federal Reserve Chairman is not an easy task. He has to find a way to tell the truth, without telling the truth.
But the truth is simple: We are still very close and playing a very tough balancing act to another market downturn.
The Double Take
Just days before Bernanke’s speech, gold climbed once again while our favourite precious metal, silver, ended the week climbing over 5%. But what’s interesting is the fact that gold started to retreat after Bernanke’ s statement about the economy.
Investors’ perception of gold relies heavily on the economic outlook of the US. While, for the most part, a strong economy should mean that gold prices should falter, that may no longer be the case.
We are in a completely different world now.
Gold and precious metals, such as silver, have been a safe haven for investors during times of economic uncertainty. It has been a preserver of wealth for thousands of years. But wealth is about how much money someone has. It’s about how much Dollar, Yuan, Euro, or Rupees you own. Ultimately, it’s about how much it’s all worth.
So even if a slow recovery has begun, as Bernanke has mentioned, that doesn’t mean gold should fall and the Dollar should rise. Even if the US Dollar eventually strengthens, it should only strengthen amongst other currencies (see the Human Metal).
You see, the US still has a lot of debt. More than it ever has. Just take a look at the rising US debt by keeping track of the US Debt Clock like we have over the past year (see the Human Metal, Another Shot at Glory, and It’s Bigger Than Ever)
With that kind of debt, gold should have an even stronger place in preserving wealth. Even if the economy roars over the next five years, the US will still be busy paying back the trillions of dollars they borrowed from the Fed and from countries around the world.
That’s why gold, and other precious metals, shouldn’t really fall that sharply on strong US economic numbers. Not this soon into the so-called “recovery” anyway.
In fact, if you look into Bernanke’s recent statement, he insured that:
“Regardless of the risks of deflation, the FOMC (Federal Open Market Committee) will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally.”
In short, Bernanke said that the central banks will act if “unexpected developments” cause the recovery to falter. That means the spending of even more dollars. More borrowed dollars, that is.
Either way, we are confident that the US economy is being held together through generous spending of borrowed money. So if we don’t go into a double dip, its more than likely that this spending of borrowed money played a big role in preventing another downturn.
At the pace interest accrues on these trillion dollar loans, precious metals should move even higher when pegged against the US Dollar.
Now, if we do go into a double-dip, we already know that means precious metals will continue to climb. So either way, there is strong evidence to support that precious metals will continue their run, regardless of the economic outlook.
So the next time your parent’s tell you that money doesn’t grow on trees, you can tell them they’re wrong. The US does it everyday…
Until next time,
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