Kitco
 

Gold Up-Date - May 02, 2011

 

By David Levenstein

May 2 2011 11:03AM
www.lakeshoretrading.co.za

   

Gold prices set to go higher due to expansionary monetary policies of US Federal Reserve. 

Last week gold prices ended on a high note. The price of spot gold hit another record high of $1570 an ounce and the upward momentum looks set to continue. Gold has risen to new record nominal highs as the dollar continues to be sold in international markets. Gold has eked out smaller gains in other fiat currencies but remains close to record nominal highs in euros, yen and pounds.

While the US Federal Reserve Chairman, Ben Bernanke was giving his first regular conference the price of gold edged higher and the dollar’s down trend accelerated breaching the 73 level on the Dollar index to make a new three year low at 72.83. Almost everything else climbed against dollar, and when it came to the major currencies the Swiss Franc and the Australian dollar gained the most against the falling greenback.

The Swiss Franc jumped to new record high against the dollar after comments from the SNB President Hildebrand about inflation. He reaffirmed that the SNB is totally committed to maintain price stability and said the bank "will not hesitate to take all measures necessary to ensure price stability in our country, also in the future".

The Australian dollar also made a new record high against dollar last week. CPI accelerated to 3.3% in the first quarter, which was above the RBA's target of 2-3% and well above market expectations of 3.0%. The RBA has maintained rates at 4.75% since November last year.

The Japanese yen was another weak currency last week. The BoJ left rates unchanged at 0-0.1% as widely expected. The bank rejected a proposal by a deputy governor to expand the asset purchase program even though Governor Shirakawa indicated earlier that it's ready to add additional stimulus if necessary. 

While closely watching the press conference with Bernanke, I was truly amazed at a few of his statements. While I have no intention to be judgmental especially since Bernanke merely inherited the problems of the previous administration and was not the person who caused this financial crisis, I was, nevertheless, amazed at some of his statements. Whether you believe in his policies or not, when he was asked about the falling value of the dollar Bernanke stated that the value of the US dollar is an issue of the Treasury Department. He said, “Well you know, the person in charge for the value of the dollar is the secretary of the Treasury.” But, unless I am mistaken I always believed that it is the Federal Reserve and the bankers that have a monopoly on the creation of this debt-based money. No one else is allowed to create money in the US.

Most people believe that the Federal Reserve is an agency of the federal government.  But, that is absolutely not true.  In fact, the Federal Reserve itself has argued in court that it is not an agency of the federal government.  Rather, the Federal Reserve is a privately-owned banking cartel that has been given a perpetual monopoly over the US monetary system by the U.S. Congress.  In the past the Federal Reserve has operated in great secrecy, and it has never been subjected to a comprehensive audit and it is not accountable to the American people.  Yet, the decisions that the Federal Reserve makes have a dramatic impact on the lives of every single American citizen. So, how Bernanke can say that it is the Treasury that determines the value of the US dollar and not the Fed remains a mystery to me.

Central banks control the supply of the monetary base by buying and selling assets. Purchases of assets, of any type, increase the monetary base when the central bank pays for such assets with currency or increased central bank deposit liabilities. Similarly, central bank sales of assets, of any type, reduce the monetary base when the purchaser surrenders currency or central bank deposit liabilities in payment. From 2008 until now, the US monetary base has increased from a base of around USD800 billion in 2008 to more than USD2.4 trillion. The consequence of such action has led and will lead to the further debasement of the US dollar as well as higher inflation. And when it comes to inflation Bernanke’s explanation totally mystified me.  He blamed global demand for the higher prices of commodities and made no reference to the money supply being the problem. 

According to Bernanke the current escalation of commodity prices was due to increased global demand. What nonsense! Did the population of the world suddenly double in a year because prices of some commodities have? According to the World Bank during the last year the price of corn has risen by 74%, wheat 69%, Palm oil 55%, Soybeans 36% and Beef 30%. But, in addition to these commodities the price of gold and silver is up as well as prices of crude oil and base metals. All this has nothing to do with increased global demand and has more to do with the declining value of the US dollar.

In a recent interview on King World News, Peter Schiff had this to say. “Ben Bernanke may deny that there is a causal relationship between his monetary policy and rising prices but the market knows differently.  In fact when Ben Bernanke denies the relationship, then the expectation is that he is going to continue on his current monetary policy course which is the green light to buy gold, buy silver, buy oil, buy commodities, sell the dollar and that’s exactly what’s happening.  That’s why the dollar is hitting new lows today.” 

“You could see the dollar begin to fall as soon as the statement was released, and then the fall intensified when he (Bernanke) began opening up his mouth.  He’s either lying or he’s incompetent or a combination of both, but neither inspires confidence in our country, our currency or our economy.”

The other statement that I found misleading was when Bernanke said that a strong, stable dollar was in the interests of the United States and the world economy. An expansionary monetary policy leads to the debasement of the currency which ultimately leads to inflation. Inflation is the direct outcome of monetary expansion in the absence of economic growth. And, gold and silver will be direct beneficiaries of such policy.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." -Ludwig Von Mises.

TECHNICAL ANALYSIS

For months now and despite the occasional rally I have maintained that the value of the US dollar is headed lower and I still maintain that in the short-term we will see it hit 72 and then 70. This being the case, I would not be surprised to the price of gold trade between $1600 an ounce and $1650 an ounce.  

David Levenstein

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About the author: David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

 His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.