What You Need to Know Mark Jasayko MBA, CFA, Portfolio Manager
Markets – Weekly Notes: July 29
The World According to Ben Bernanke: A week ago Ben Bernanke testified over two days before Congress and took pains to convince us that no one really knows about investing in gold and what the price of gold should be. This sort of preaching has been his style when he is trying to counter thoughts and beliefs that are opposed to his or when responding to challenges against the policies that he deploys. The reality, based on gold’s investment characteristics, is that investing in gold is a bet against the success of experimental monetary policies. A rising price for gold represents a bet against Ben Bernanke.
Gold has risen more than fourfold since bottoming out in 1999. It isn’t four times tastier, or four times more brilliant, or produces four times as much income as it did before. It still looks and feels the same and still produces no income. It is only a barometer of the confidence or the lack of confidence with respect the potential and actual devaluation of the U.S. dollar, something over which the Fed has great impact.
Bernanke also went on to lecture us about worrying about the size of the Fed’s balance sheet (which contains mortgage bonds, Treasury bonds, and some toxic investments purchased in exchange for newly printed money). The balance sheet is already incredibly bloated by historical standards, and it continues to grow. Bernanke suggested that it will be a good thing when the balance sheet grows at a slower pace. This is a bit like an unhealthy overweight individual saying that they will be in better shape when their consumption of Big Macs slows down a bit. But this doesn’t do much with respect to reducing serious illness. In the case of the Fed balance sheet, slowing the pace of money-printing/bond-buying doesn’t do much with respect to reducing future inflationary problems and economic imbalances.
Bernanke claims that a bloated Fed Balance sheet is not a problem and that the market should give him some credit when its growth is expected to stop sometime next year (only a promise at this stage). Sounds like he is trying to sell us easy excuses instead of doing the needed hard work. And suggesting that we shouldn’t bet against him by investing in gold.
Best regards,
Mark
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