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.
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