Bernanke Holds a Match to the U.S. Dollar

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Fed Chairman Ben Bernanke might as well have torched the dollar Wednesday. If he keeps running the Treasury's printing presses until they overheat, he could send the currency of the land spiraling into an inflationary funeral pyre.

While parroting that familiar, insultingly empty rhetoric regarding the importance of a "strong and stable" U.S. dollar, he handed global markets a map upon which all roads seem to lead directly to a full-blown dollar crisis.

In a first-ever press conference for a Fed chairman, Bernanke made clear that the "extended period" for which zero-bound interest rates are warranted remains, well ... extended. He confirmed that reinvestment in expiring securities will keep the monetary muscle of QEII in effect even after the $600 billion has been deployed by June. He even kept a straight face while calling inflationary pressures "transitory."

If Fools seem skeptical about that, perhaps they're already experiencing inflation in a way that Bernanke's innocuous-sounding figures simply don't reflect. Wal-Mart (NYSE: WMT  ) CEO Mike Duke sounded an inflationary wake-up call this week, noting that gasoline prices "are really having an impact on the consumer," and that his company's core customers are under "more pressure today than a year ago."

In a scathing editorial, The New York Sun observed:

The chairman spoke of the high cost of gas without once acknowledging that the price of gasoline is lower in value -- meaning it takes less gold or silver to buy it -- than it did at, say, the start of President Obama's term. The president seemed oblivious to this irony when he spoke in his radio address over the weekend of how there is no "silver bullet" that will deal with the soaring gas prices.

The real "Bernanke put"
Even as Bernanke spoke, the U.S. dollar index crashed unceremoniously through near-term resistance, setting the stage for an historic retest of the index's all-time low of 71.32 in spring 2008. When that last leg of technical support for the dollar buckles, I believe the acute currency crisis that I warned fellow Fools about more than two years ago will enter a new and highly disruptive chapter. We can only hope that this story may still have a happy ending.

As it happens, according to economists at Deutsche Bank, the dollar has already recorded a fresh new low for the fiat-dollar era, on an inflation-adjusted basis, as measured against a trade-weighted basket of currencies.

Ever the dollar's vocal defender, CNBC anchor Larry Kudlow opined:

Mr. Bernanke just doesn't get that inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation. Instead of listening to markets, he is determined to fight them. This is a losing battle.

Gold and silver, meanwhile, stood their ground as hallmarks of immutable value. The reiteration of the Fed's stance came at a particularly timely moment for silver, which had just retracted in volatile fashion over the preceding days, after forcing into retirement the old nominal high price of $48.70 notched on Silver Thursday in March 1980. Remarkably, trading volume for the iShares Silver Trust (NYSE: SLV  ) bullion proxy actually surpassed the volume traded in the typically hyperactive SPDR S&P 500 ETF (NYSE: SPY  ) earlier this week.

Now, with a fresh Bernanke-boost in place, it seems to me that only a miraculous, immediate, and fundamentally unwarranted rally in the U.S. dollar -- to somehow avoid that fearful encounter with its all-time low from 2008 -- could snap the near-term momentum in gold and force a retreat in silver from psychological resistance at $50. While traders fight in the COMEX futures pits to determine the near-term dynamics of exchange rates between the three currencies -- gold, silver, and the dollar -- ultimately I maintain my long-term view that $1,500 gold is just the beginning.

Personally, I hope I'm 100% wrong about all of this. I would rather lose every last penny that I have invested in my top gold pick, Gammon Gold (NYSE: GRS  ) , or the immensely profitable Silver Wheaton (NYSE: SLW  ) , than be forced to observe the disorderly dethroning of the world's primary reserve currency. As I have stated before, though I have staked my investment capital in accordance with my macroeconomic outlook, gold's rise is for me a somber affair.

When I suggest to Fools that long-term strength in gold and silver prices is likely to carry even recent underperformers Agnico-Eagle Mines (NYSE: AEM  ) and Hecla Mining (NYSE: HL  ) into unimaginable heights of profitability, I feel none of the excitement that might otherwise accompany such an ardently bullish forecast. Simply stated, gold and silver offer the clearest means for investors to defend their capital against the fiat currency scenarios now materializing before our very eyes.

David Woo, a currency strategist for Bank of America Merrill Lynch, summarized one such scenario in terms that ought to demand your Foolish attention:

In our risk scenario, little progress on the fiscal front raises the probability of a fiscal crisis and the odds that the Fed becomes the buyer of the last resort. This would accelerate the process of the USD's demise as the global reserve currency and cause it to decline in a disorderly manner.

If U.S. Treasuries were a viable safe haven asset at present, then the world's largest bond fund would own some. PIMCO has shed all such exposure, and has even initiated a short position. Nobody seems capable of answering PIMCO head Bill Gross' non-rhetorical question: Who will buy Treasuries when the Fed doesn't? Someone has to bankroll the dauntingly massive gap between federal expenditures and revenue still emerging from Washington, and the bond market has relied upon QEII to fund 70% of U.S. debt issuance since its inception.

Lamentably, because the U.S. dollar has proven the ultimate sacrificial lamb in Bernanke's ongoing bid to forestall the ramifications of a deleveraging event, I continue to view the dollar's frightful cascade into uncharted depths of value erosion a fate that has already been sealed. Investors face no such grim certainty, and I continue to recommend gold and silver as immutably defensive assets against the specter of a cascading dollar crisis.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Gammon Gold, Hecla Mining, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gold-denominated disclosure policy.

Read/Post Comments (10) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2011, at 11:13 AM, A700 wrote:

    This following an article by another MF contributor suggesting silver WILL fall by 60%. I tend to agree with Mr. Barker but it's getting more and more difficult to know what to believe.

  • Report this Comment On April 30, 2011, at 1:34 PM, bartbertholic wrote:

    Sure doesn't look good -- buy silver to protect, I guess

  • Report this Comment On April 30, 2011, at 2:06 PM, ionthemarket wrote:

    I think this is a very good article. Clear and well thought out. One of the reasons silver is on the move because it is still affordable and people are nervous about what is happening with US economics.

    I don't share Bernanke's belief that printing another few thousand tons of paper every other week is going to ultimately solve this problem.

    Here is another intelligent, level headed article to read:

  • Report this Comment On April 30, 2011, at 4:16 PM, Gonzhouse wrote:

    The Fed's actions amount to little more than a Ponzi scheme: print more dollars. Like all Ponzi schemes, they collapse when the supply of new people willing to take the bail are overwhelmed by the volume required to keep it going. This will not be pretty when the music stops.

    More people are coming to this conclusion. In another article today that talked about "Silver dropping by 66%" the author opened the biggest can of Whoop-A** I've ever seen on this site.

    Investing in silver and gold miners is a way to accumulate more depreciating dollars in the hopes of maintaining some wealth. I share Chris' sadness that rather than looking to US industrial investments for real inflation-adjusted gains we are running to a currency-alternative for loss mitigation.

  • Report this Comment On May 01, 2011, at 12:19 AM, angelajellis wrote:

    Silver bugs point out that the ratio of silver/gold in the earth's crust is 16:1, and that's the historical ratio that's been in play for 60 years.

  • Report this Comment On May 01, 2011, at 12:14 PM, CMFSoloFool wrote:

    The sad state of our fiscal affairs is really creating a major problem for us in the years to come. The devaluing of the US$ may appear to help the trade deficit, and it would be fine if we were not so dependent on foreign manufacturing. But as it is, the resultant inflation will kill us. Consumers will have less disposable income for buying goods, and ever decreasing collateral in their homes.

    I'm not sure that raising rates will solve the issue. We need to stop borrowing money by eliminating the deficit, and paying down the debt. But ultimately, as long as we continue to be dependent on imports for virtually everything we buy, there may be no way out.

    I've been invested in Oil for quite some time, and recently started buying Gold and Silver positions as well, but it's just not enough. I'm a bit afraid to go too far overweight in these. On the one hand it's a good hedge against the free fall in the US$, but where does it end? It's depressing.

  • Report this Comment On May 01, 2011, at 12:59 PM, Yourdeadmeat69 wrote:

    Great writing in that title. In one of the previous articles, somebody wrote silver may fall 60%. They're right! It's going to go from $199 and ounce all the way back to $82 by next September.

    Really folks have been predicting silver's on a parabolic rise up, and needs to take a breather.

    Really? Is it just possible, that silver has been held down so long, a regression to the mean, means that whatever was worth $50 in 1980, peak silver, is worth, just using inflation approved by those thieves in Washington, about $136?

    $136 FMV. Or if you like, silver compared to 1981, is about $22 with $30 to run? Which means about $86 in today's funny money.

    Silver and gold will fall when the dollar shows some competition, but as long as printed fiat money has no backing from things of real value, and offers zero "interest", nobody is interested in that kind of paper versus gold and silver.

    And the classic way of putting a damper on silver and gold other than interest rate hikes, namely requiring more margin of the gamblers on the exchange to put up more money for futures contracts actually contributes to the pop in silver.

    Why? Because there is so much short interest in silver at such low dollar levels and in such high quantities, everytime silver backs off a couple bucks, silver shorties rush in and put a floor, no, a new ceiling on higher silver prices.

    What does that mean in English? If you're a dollar bull, you're going to need significant irate pops before there is a dent in the silver short market--and they'll hold that baby up for YEARS.

  • Report this Comment On May 02, 2011, at 9:08 AM, Bernankonit wrote:

    These Fools recommended Rosetta Stone 6 months ago. My silver doubled in those 6 months while their #1 horse plunged. Every day silver has a bad day these bubble articles come out of the woodworks, with no mention of monetary policy and paper printing.

  • Report this Comment On May 02, 2011, at 8:49 PM, lnardozi wrote:

    You can be certain anything Bernankio says is a lie.

    I am up 600% in silver over the past few years.

    Any Questions?

  • Report this Comment On May 03, 2011, at 7:00 PM, rfaramir wrote:

    I'm totally with Chris, and according to the votes so far, he's preaching to the choir.

    Here's more ammo: "in the end the real capacity for silver and gold prices to rise is equal to the determination of central banks to control the interest rate structure." And you know the Bernanke is committed to controlling interest rates...

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