Gold Calls Bernanke's Bluff

By Dan Denning • June 20th, 2008 • Related Articles • Filed Under
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Dan DenningDan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.

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* Aquaculture: Soybeans and Corn Under Water
* Farmers Say ‘Rain, Rain Go Away’ Throughout the United States
* Farmers Feel Consumers Blame Them for High Food Costs
* Record Misery Index Sends People Scrambling for Gold
* Why Choose Gold When Real Interest Rates Sink?

Filed Under: The Americas
Tags: bernanke • Gold

Gold and silver are calling Ben Bernanke's bluff this week. Bernanke huffed and he puffed and he bluffed and he bluffed all month long about inflation. But the market realises that with America's housing market mired in the muck, the Fed won't be raising rates to defend the greenback this year.

In the futures market, the odds of a Fed rate rise dropped from 26% last week to 12% this week. The U.S. dollar continues to fall and gold was up US$6.60 in New York trading while silver hit US$17.34. Commodities have spoken. "Liar!"

Is there a big move coming in the precious metals? The Fed's open market committee meets next week to discuss and set the price for America's money. By then, we reckon traders will have a healthy scepticism that the Fed is willing or even able to defend the dollar with higher rates. Gold and silver have been treading water, technically speaking, for a while. Don't be surprised to see new investment demand for precious metals as an inflation hedge.

Once you get people expecting higher prices, it's hard to change their mind. Inflation is like a mental contagion. The Fed should know this. It started the epidemic with lower rates.

This isn't good: "Australia's mortgage arrears rate rose to a record in March as borrowers struggled to make repayments because of rising inflation and higher interest rates, according to Standard & Poor's."

That's from the Age. "Payments more than 30 days late on so-called prime loans increased to 1.45% of mortgages used to secure bonds, from 1.37% in January, S&P said in a report."

It's not a tsunami of defaults yet. But as far as we can tell, many Aussies remain convinced housing prices never go down. Most are unaware that a mortgage bubble is responsible for rising house prices, some the demographic flim-flammery you get from the housing industry.

Is protein about to get more expensive? We haven't covered the flooding in the mid-West of the US because it's in the US, not Australia. But everything affects everything in the globalised world. If US corn production craters because of a lost crop due to the massive spring floods in America's Corn Belt, there will be less corn. Less corn for ethanol. Less corn to feed animals like pigs and cows, which give us hungry humans are protein.

You can substitute wheat and rice for corn. But there's no replacing Iowa. Oil rigs can be rebuilt after cyclones. If you lose an entire year's crop or your farmland goes under water, it might be a good idea to stock up on staples. They're probably going up in price. It shows you just how valuable farmland is as capital.

Dan Denning
The Daily Reckoning Australia