Bernanke speaks, gold rises

2012-FEB-08

When perma-bear economist Nouriel Roubini turns bullish on the stock market, it’s wise to sit up and take notice. In the words of Gina Sanchez – director of equity and allocation strategy at Roubini’s firm – “We’re a believer; we’re celebrating. We think the rally has legs”.

Silver is responding particularly well to the increasingly bullish sentiment, with the price breaking above $34 per ounce in trading yesterday afternoon. As can be seen from this chart for the ETF SLV, volume remains subdued in comparison to much of last year – meaning that the silver price is vulnerable to painful corrections, as well as dramatic spurts higher.

As Dan Norcini points out at his blog, $35 is now a key resistance level for silver. If the bulls can push through this level soon, the silver price could start the kind of trending move higher we saw in the winter and early spring of last year. As the old traders’ cliché goes: “the trend is your friend”. Silver will likely move very fast, very quickly towards $40 once it’s above $35.

The dollar had another limp day yesterday, with the Dollar Index now trading at 78.55. Federal Reserve Chairman Ben Bernanke certainly offered no comfort yesterday to the dwindling band of dollar bulls out there – placing pointed emphasis in testimony to Congress on the problem of stubbornly high unemployment. He even alluded to the problem of underemployment, and the fact that the headline unemployment rate discounts the large numbers who are not counted as part of the workforce, on account of long-term unemployment. In his words: “It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work”. Doubtless many in the Obama administration would be somewhat uncomfortable with such remarks.

Bernanke’s emphasis on the unemployment problem is another means of emphasising that Fed will keep interest rates at zero until late 2014 – though as Bud Conrad of Casey Research argues, rising inflation will likely force the Fed to raise rates before then. But Conrad notes:

“My conclusion from the Fed's actions is that it doesn't care as much about its inflation target as it does about improving the unemployment rate. Thus, it will err on the side of letting inflation rise, if it would improve unemployment. But holding rates too low too long fueled the housing bubble. Repeating the same game will have consequences of malinvestment in the form of new bubbles in the economy. The Fed hopes to restore employment before the negative consequences of loose monetary policy show up.”

It should also be pointed out that the notion of a trade-off between inflation and unemployment is suspect to say the least, for reasons best explained by the late American economist Murray Rothbard. But this won’t step the Fed and other central banks from believing otherwise – with serious consequences for the value of national currencies.