Gold Price: Full Steam Ahead to $2,000/oz.

Over a year ago, on May 6, 2010, this blog launched with a first post on the attractiveness of gold as an investment. On that day the price of gold was just under $1200/oz, and as it became clear that the Federal Reserve was about to embark on another large round of money printing, which later came to be known as QE2, I felt compelled to grab the keyboard and start typing (see articles tagged 'Gold' both here and on SeekingAlpha for further reference).

During this time it has been amusing to watch the professional punditry drone on about a  "gold bubble" and observe various blogger bets about how gold's run couldn't last. The biggest amusement of all, however, has been the disparaging remarks from those such as Berkshire Hathaway's Charlie Munger, who belongs to a group I've taken to calling the 'gold haters'.

Suggestions from credible policymakers, such as the World Bank's Robert Zoellick advocating a return to the gold standard, have lit a fire under the barbarous relic's price this past year. Today, with gold pressing above $1700, or nearly 50% higher in just over a year, I can't help but comment on how we've heard nary a peep of late from the anti-gold crowd.

Where to from here? As long as three key fundamental forces persist then the rise in the price of gold will continue unabated. Those forces are:

1. Low interest rates, a hallmark of the current program of financial repression, which is only just getting started and should extend for many years to come.
2. Continued central bank purchases of gold by countries such as South Korea, Thailand, Russia, etc.
3. More money printing, which we've seen in spades of late with Italian and Spanish bond buying, Bank of Japan and Swiss National Bank currency intervention, and the Fed's rumored QE3.

Continue reading the full article at SeekingAlpha here.

Fed President Hoenig Opens-up on Why He (in Fedspeak) 'Went Off the Reservation'

Kansas City Fed President & FOMC Member Tom Hoenig

FOMC-member Thomas Hoenig explains why he has been the lone dissenting vote against the Fed's zero interest rate policy (ZIRP), which is coming up on an extraordinary three years.

Link to audio recording include Q&A here, and below is a brief bio:

Thomas M Hoenig is president and chief executive officer of the Federal Reserve Bank of Kansas City. He assumed the role of president on October 1, 1991, making him the longest serving of the 12 current regional Federal Reserve Bank presidents. He is senior member of the Federal Reserve System's Federal Open Market Committee, the key body with authority over national monetary policy in the United States.

Video: Niall Ferguson -- Empires on the Edge of Chaos

Featured on FORA.tv, broken out in subject chapters in the links below. Be sure to check out the Q&A.


01.    Introduction    09 min 09 sec
02.    Niall Ferguson Opening Remarks    01 min 40 sec
03.    Historical Cycles of Empire Decline    07 min 07 sec
04.    Complexity Theory    08 min 20 sec
05.    Implications for the United States    06 min 22 sec
06.    Interest Payments as a Share of US Revenue    01 min 56 sec
07.    Failure of Perception    02 min 43 sec
08.    Debt Payment Overtaking Defense Spending    06 min 58 sec
09.    Q1: Healthcare Reform    04 min 10 sec
10.    Q2: China's Military Sustainability    02 min 38 sec
11.    Q3: Gold Investing    01 min 24 sec
12.    Q4: Political Stability of China    02 min 42 sec
13.    Q5: Children Teaching You About Debt / Radical Islam    03 min 57 sec
14.    Q6: Advice to Obama    02 min 40 sec
15.    Q7: Limits of Keynesian Stimulus    03 min 46 sec
16.    Q8: Better Leadership in the West    03 min 27 sec
17.    Q9: Fear of Hyperinflation    05 min 09 sec

Play the ECB's New Monetary Policy Game

The European Central Bank's previously released web-based game (ironically titled 'Euro Run') must have been a smashing success because it has created yet another game. This latest one allows you play armchair central banker; a virtual Ben Bernanke or Jean-Claude Trichet so to speak.

Question: which of the following would you rather have your central bank investing time/energy in and printing money to pay for:

a. recently released comic book created by the New York Fed
b. the ECB's above video games
c. none of the above

Video: Ben Bernanke Interview on 60 Minutes (sans ironic Chase ad)

Federal Reserve Chairman Ben Bernanke conducted a post-QE 2 interview on CBS's 60 Minutes program last night (his June 2009 60 Minutes interview can be viewed here).

One similarity and one difference between the two 60 Minutes interviews:

1. Similarity: he still gets nervous when speaking on television (and in front of Congress for that matter).
2. Difference: Bernanke is no longer willing to acknowledge that he's "printing money". In fact, Bernanke now denies it:

"One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."

The below chart, however, suggests otherwise.

Chart courtesy of Felix Salmon.

So why is Bernanke denying that he's printing money when the Fed has clearly expanded the money supply? Semantics. And why would Bernanke start playing word games now? Because Bernanke has chosen to get political, and in politics semantics matter.

Later on in the interview Bernanke, for the first time, dips his toe into the government fiscal debate currently underway in Congress over tax cuts, the deficit, entitlements, etc. Whether you agree if this is or is not appropriate for a Fed Chairman (or with Bernanke's politics) is not necessarily the most important element here. The change in what Bernanke is openly speaking out about compared to what he's previously remained mum on is perhaps the key observation.

Every single word uttered by a Federal Reserve Chairman is carefully considered and reviewed before being communicated publicly. The reason: the Fed Chairman's words can have a powerful effect on investor psychology and global financial markets. Is it this pressure to stay on script which is making Bernanke so nervous when he knows he's on TV? I haven't spent time with Bernanke in private so unfortunately I can't compare how he communicates in a more informal setting with how he is on television.

Appropriately, the CBS online video version of the interview features an ad for a new Chase Bank card called "Slate", which gives the interview a "Ben Bernanke, brought to you tonight by Chase CEO Jamie Dimon" quality. Appropriate perhaps, and also hard to believe Too 'Bigger' to Fail Dimon wanted his advertising budget used for such rich irony.

I hope you won't mind my sparing you from being subjected to Chase marketing, which is excluded in the below YouTube version of Bernanke's interview.

Video: Why Printing Money is referred to as 'Quantitative Easing'

Armchair Budget Balancer - You Play Congress & the President

Something nifty courtesy of the NY Times. Here's the description of their new, interactive budget balancing tool:

"Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online."

Related article here.

Update: There has been some criticism of the lack of options provided in the NY Times' tool. For example, the option of switching from an income tax to a consumption tax (e.g., Fair Tax) was left out. According to the NY Times Economics blog this was done due to the fact that such a change is not politically feasible. I expressed my disappointment in the comments that an economics blog was concerning itself with political feasibility at the expense of promoting optimum economic policy:

"There are a lot of great ideas that don't garner much support in Congress. This may explain why Congress's approval rating is around 10%."

Is Bailing Out Irish Banks Worth the Blood and Violence?

Why QE2 Won't Be Announced at Tuesday's Fed Meeting

Amid rampant discussion of further 'quantitative easing' the market's eyes will be fixed on the Federal Reserve when it meets on Tuesday this week.

In understanding why it is unlikely for 'QE2', as it is being dubbed, to be announced at this week's meeting it is helpful to briefly review the Fed's history and the political environment in which it operates.

Argument for Fed Independence

One of the key justifications for the creation of the Federal Reserve was to "keep politics out of monetary policy". In the Federal Reserve Act passed on December 23, 1913 Congress delegated its Constitutional authority over the nation's money supply ("to coin money, regulate the value thereof") to the newly created Federal Reserve System.

The Fed is free to make independent monetary policy decisions -- such as shrinking or expanding the money supply -- without the prior approval of Congress or the President. The logic behind thus empowering the Fed is that the nation is better off with its monetary policy entrusted to an institution that -- unlike Congress and the President -- is not directly accountable to the voting public. (Not exactly a strong vote of confidence in democracy!)

The theoretical problem with allowing elected politicians to directly control monetary policy can be illustrated through the following hypothetical example of a politician seeking reelection:

A politician might deem it advantageous to his reelection chances if there were a well-timed increase in the money supply. The reason? An increase in the money supply can (and often does) boost asset values (i.e., stocks, housing prices). A stock market rally -- prior to an election -- can in turn boost voter confidence. And more confident voters are less inclined to throw an incumbent politician out of office. While economic conditions may in fact make an increase in the money supply imprudent due to the post-election side effects (e.g., housing price crash), a politician's motivation to get reelected may trump economic logic. 

U.S. President Andrew Jackson vs. the Bankers

The above example can also be turned around to show how it can be politically advantageous to decrease the money supply. For example, in 1833 a reduction in the money supply was orchestrated in an attempt to cause President Andrew Jackson to lose reelection.

In theory, the Fed -- by virtue of its inoculation from public elections -- can base its monetary decisions (e.g., whether to shrink or increase the money supply) on the true economic conditions, and not the election calendar.

However, the Fed is not immune from politics. In fact, Fed Board members have their own mini-election gauntlet to run. To be elected to the Fed Board a person must be nominated by the President and confirmed by the Senate. And that final step, as recent events bear witness, is proving problematic.

Senate Stonewalling Fed Appointments?

In April of this year President Obama announced nominations for the three Fed Board openings and so far none have been approved by the Senate. In fact, the last time the Federal Reserve Board had all seven positions filled was back on April 28, 2006.

On Friday came news that Senator Richard Shelby (Republican, Alabama) had rejected President Obama's nomination of Peter Diamond for the Federal Reserve Board stating "it is not clear...that his background is ideally suited for monetary policy, especially given the current challenges facing the Fed".

Of note, Diamond is considered an inflation 'dove' and close Ben Bernanke monetary policy ally. Interestingly, Diamond was also one of MIT professors a then 25-year-old Bernanke thanked for supporting his doctoral dissertation. One perhaps not so outlandish interpretation of Shelby's move is that Republicans are trying to keep the Fed paralyzed.

Diamond's appointment would help Bernanke with what has proven to be a publicly divided Fed. In the face of significant Fed Board dissent, Bernanke's consensus orientation will make him reluctant to activate QE2.

Republicans Want QE2 Postponed Until After November Elections

I've written previously about Chairman Bernanke's well documented plan for dealing with the present challenge of deflation. Put simply, his plan is to print a lot of money.

The announcement of QE2 would likely trigger a rise in stock prices. An autumn stock market rally -- in addition to signaling that the 'Bernanke Put' is every bit as solid as the 'Greenspan Put' -- could be a reelection boon for a Democratic incumbent majority that is in deep trouble.

Shelby's rejection of Diamond delays his appointment at least until Congress returns from recess in mid-September (Obama's other two Fed nominees are on ice until then as well). Don't be surprised to see the Republicans stall further until after November elections. As such, investors timing an imminent announcement of QE2 are likely to be disappointed.

Federal Reserve Continues March Down the Primrose Path

Federal Reserve Chairman Ben Bernanke and his army of monetary economists have now had four months to observe the lay-of-the-economic land since winding down their massive $1.2 trillion in mortgage bond purchases.

How do things look? Based on the Chairman's recent comments, not good.

Peer Pressure, Washington Style

When the economic going gets tough and then stays tough for a protracted period there is one institution politicians can be counted on to turn towards for help, and that institution is the nation's central bank.

In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).

With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so." 

What 'bullets' are Jim and Ben referring to?

The Mother of All Bullets

To answer the above question we have the luxury of being able to refer back to the verbatim text of a speech Ben Bernanke delivered in 2002 titled Deflation: Making Sure "It" Doesn't Happen Here (which I've written about previously). 

The economic problem du jour just so happens to be deflation. In the speech, Bernanke outlines detailed steps the Fed could take to combat deflation, which is basically a widespread decline in prices. The last time the U.S. experienced this was during the Great Depression, an area of economic history which Dr. Bernanke is considered to be one of the pre-eminent experts. 

Bernanke's most oft-quoted line from his 2002 speech: "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Put simply, Dr. Bernanke's deflation prescription is to print a 'ton-o-money'. 

How much money? Given that the nearly $2 trillion printed since the inception of the 2008 financial crisis hasn't created significant inflation concerns, estimates as high as an additional $5 trillion may not be beyond consideration.

QE2: No Longer a Question of If, But When

On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.

One interpretation of Bullard's comments is that the Fed is laying the groundwork for 'QE2', the shorthand label which has attached itself to the Fed's latest scheme.

Market Timing QE2

With QE2 fully baked when precisely will it begin?

November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.

In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.

Meanwhile, In Government Debt La-La Land...

In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"

Uh, yeah.

The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.

Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.

Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".

There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.

Is the Fed About to Go Nuclear?

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system and for the global economy. Think the unthinkable." 

- Andrew Roberts, Credit Chief, Royal Bank of Scotland (RBS)

(Note: this article is aimed in particular at individuals that are not as familiar with concepts such as quantitative easing, inflation, deflation, and what all this talk of 'printing money' means. These concepts can appear complex and intimidating, but they are not beyond reach of non-economists. Further, they are incredibly important to everyone. My hope is that you will take the time to learn more about this important topic and click through to some of the background info links I have included.)

The latest installments from the Telegraph's Ambrose Evans-Pritchard, who has been dutifully chronicling and predicting quite accurately the unfolding global financial crisis, suggest the U.S. Federal Reserve may be about to double down on its massive money printing campaign.

Why Deflation is Good News for Gold

Today the U.S. Labor Department released its May Consumer Price Index report, considered a key inflation barometer. There was a 0.2% decline in CPI in May, the largest decline since December 2008's 0.7% decline. The May report also comes on the heels of a 0.1% decline in April. Back-to-back monthly declines in CPI may be a warning signal that deflation is gaining a toehold.

Yet today the price of gold, which in theory should tank in a deflationary environment, is rallying up 1.5% to $1250/oz as I write this. What gives? And how could deflation be good news for gold bulls?

Tea Party success, M3 shrinking, whiffs of deflation equal a chink in Gold's armor?

In the time that has passed since Tea Party candidate Rand Paul & Co.'s wakeup call victories I have been keeping an eye and ear open for perceptible changes in the political discourse.

Fresh out of the U.S.-China Strategic and Economic Dialogue earlier this week, Secretary of State Hillary Clinton today spoke about managing the U.S. debt problem as key to the country's ability to project power and influence abroad. Now, it would be surprising if former candidate Clinton did not opine on just about any topic under the sun. But it is somewhat unusual for a Secretary of State to weigh in on a U.S. debt problem.

The European debt crisis cast a large shadow over the annual Chimerica talks. While no official announcement was ever made China's growing unease over the European sovereign debt crisis and the possible implications contagion poses for China's massive investment in U.S. treasuries was a hot topic.

One potential outcome of the Tea Party's results is the effect it could have on further government largesse. Mid-term elections are just around the corner. Vulnerable incumbents must be thinking twice about casting even more votes that can be criticized for putting the federal government on the path to bankruptcy.

But is it too late for incumbents to change their ways? This evening may have provided a hint as Congress was unable to pass a $200 billion tax and unemployment benefits extension. Benefits for hundreds of thousands of Americans will now expire on June 2. This is especially surprising given that very pro-unemployed Democrats control both houses of Congress.

Should these political trends combined with inflation rising at the slowest pace since the 1960s and the U.S. money supply declining at the fastest pace since the 1930s be giving gold investors, like myself, reason for concern? Is the current case for gold, contrary to what "all-in" billionaire gold investor Thomas Kaplan woud have us believe, not bulletproof?