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Bernanke Testimony Drives Markets

Release Date: 
Friday, July 19, 2013

Gold and Silver Prices:

Gold prices ended the week higher despite Thursday’s correction following Federal Reserve Chairman Ben Bernanke’s testimony before Congress. Gold finished the week up $11.90, closing at $1,297.70. Silver fell $0.39 to end the week at $19.63.

Bernanke: Gold is Considered “Disaster Insurance”

Mr. Bernanke testified before the Senate banking committee this week, offering some startling statements on the gold market. “Gold is an unusual asset…It’s an asset that people hold as sort of disaster insurance. They feel if things go really badly wrong, at least they’ll have some gold in their portfolio.”

Mr. Bernanke questioned this role while confessing that he doesn’t understand gold prices: “Let me end by saying that nobody really understands gold prices and I don’t pretend to really understand them either.”

At least one analyst questioned the veracity of Mr. Bernanke’s statements. The vice president and precious-metals strategist with RBC Capital Markets Global Futures told Forbes, “Gold has economic and political importance so central banks do look at it….” (“Bernanke: Gold Price Decline Suggests Less Worry About 'Extreme Outcomes',” Forbes, 7/18/13.)

In other testimony, Mr. Bernanke affirmed that a number of variables exist that will affect the Fed’s decision to slow or end its current quantitative easing program. “If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.”   (“Bernanke Says Fed’s Monetary Policy Isn’t on ‘Preset Course’”, Bloomberg, 7/17/13)

Mr. Bernanke also affirmed the Fed’s commitment to low interest rates: "I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank."   (“Highlights—Bernanke’s Q&A testimony to House panel”, Reuters, 7/17/13)

Reasons Gold May Be Ready to Rise

Investment columnist Anthony Mirhaydari offered a compelling case for gold’s bright future in an MSN Money article this week. Mr. Mirhaydari  pointed to several factors which should support gold prices including: (1) rising inflation with raw material inflation growing to double digits for the first time since “the inflation scare” of 2011; (2) increased gold demand, especially in China; (3) the Federal Reserve has “swelled the monetary base from around $800 billion before the recession to $3.3 trillion now, an unprecedented experiment in money printing that is bound to lower the dollar eventually;” (4) an increase in energy; and (5) the rising costs of mining gold.

“Add it all up, and gold is likely trading near a hard price floor that will be held steady by a combination of Far East physical buying and cuts in gold production. The price seems unlikely to go much lower, which should ease worries that the gold market is still in a bubble. How much it recovers, and eventually gains, will be determined by the path of inflation and Fed policy. The latter seems to favor pricier gold, since the Fed appears ready to keep the cheap money going, with the U.S. economy growing at a piddling 1% to 1.5% a year pace. The dollar's newfound weakness should help gold as well.” (“Gold is ready to shine again”, MSN Money, 7/17/13.)

Gold May Rise to $4,300, Silver to $148—Rosen

Veteran investor and newsletter writer Ron Rosen sees new record highs for gold and silver in 2016.  “I expect the gold price to hit $4,300 in early 2016, but the really fascinating thing here is the silver chart because there have been three peaks.  The first peak increased two times from the previous low.  The low was $4.01 and silver went over $8 in that move.  The second peak was $21.44.  So silver increased four times the previous low, which was $5.45.  The third peak was $49.82, and that was six times the previous low, which was $8.40…You’ve got an old guy like me who has been at this business for almost six decades, and he sees 2, 4, 6.  There’s only one number that comes up next, 8.  We then multiply 8 times the low of $18.17, and we have a silver price of over $148 sometime in early 2016.  It’s as clear to me as the sun rising and setting.” (“Silver Set to Advance A Remarkable 800% From Current Levels”, King World News, 7/15/13)

Sen. Rand Paul Calls for Gold Standard Commission

Kentucky Senator Rand Paul told reporters that the United States should form a commission to consider a possible return to the gold standard.  “We need to think about our currency that once upon a time had a link to a commodity and I think we should study it....Right now we have a dollar that has lost 96, 97% of its value over the last 100 years. The Federal Reserve is supposed to keep the value of the dollar... they aren’t doing a very good job.”  (“Commission Needed to Reconsider Gold Standard:  Sen. Rand Paul”, Kitco, 7/16/13)

Ronald Reagan formed a commission to explore a gold standard during his first term as president. Among the commission members was Senator Paul’s father, former Congressman Ron Paul. Congressman Paul co-authored the Commission’s minority report recommending a return to the gold standard. That report was described by one commentator as “a blueprint for 21st-century monetary reform.” (“The First Gold Commission Scared the Dickens Out of the Fed,” Forbes, 8/28/12.)

Detroit Files for Bankruptcy Protection

Detroit, once a thriving city of nearly 2 million people, filed for Chapter 9 bankruptcy, making it the largest U.S. city to seek bankruptcy protection. Both the municipal bond markets and pension funds will watch this bankruptcy closely because of the long term ramifications. “In recent weeks, as Detroit officials … have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers — a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments and all but certain to be paid in full. Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the State Constitution that union leaders say bars such cuts. Officials in other financially troubled cities may feel encouraged to follow Detroit’s path, some experts say.”    (“Billions in Debt, Detroit Tumbles Into Insolvency”, NYT, 7/18/13.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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