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Gold Knows

A grudge match of epic proportions has been developing. Like Ali and Frazier, these two pugilists have been taunting each other, name calling, daring their counterpart to step into the ring and get the beating they so richly deserve.

This championship match, the Thrilla in Manilla, the Rumble in the Jungle can no longer be avoided. The contestants are fit and well-trained, the crowd is growing restless, the bets have been placed. Let the battle begin!

In this corner, weighing 195 pounds, standing 5 foot 10, hailing from Washington D.C. via Harvard, MIT and Princeton, New Jersey, wearing the M1 green trunks, the Charlemagne of Currency, the prince of paper, the bearded bard of the Fed, monarch of monetary policy, Benjamin GOLDILOCKS Bernanke!

And in the opposing corner, weighing 2046 metric tonnes -- one ounce at a time -- the shiny, precious, storehouse of value,  the standard for monetary exchange, the most malleable and ductile of the known metals, that master of disaster, hailing from most of the world, that dense, soft, shiny, yellow metal, GOLD.

The battle between these two titans has become increasingly loud and volatile as of late. Bernanke, a former inflation Hawk, recently went all Lovey Dovey: He now believes there is "growth with ebbing inflationary pressures and a stabilizing housing market."

When Gold heard this, it laughed out loud, calling the Fed Chair out for such nonsense. Gold dissed Bernanke: "I know what you fear" taunted the metal. "You're afraid of the drag on growth while inflationary pressures are building and the subprime implosion is threatening the system."

Gold knows. It knows Bernanke has been painted into a corner, hamstrung by his predeccessor, Easy Al. Even if inflationary pressures spike upwards, Gold knows Ben cannot raise rates. Gold know what’s been goin’ down in the subprime market. Gold's sees his buddy Oil (aka Black Gold) at $61 bucks.

Gold know that the slowing economy would not absorb more rate hikes particularly well. Gold also knows that the FED can’t throw the economy a lifeline by easing, either. Gold thinks the Fed is full of crap, jawboning the markets with lies: That economic growth is robust, and about to reaccelerate, that inflation is "contained;" That Housing has stabilized.

Gold laughs its arse off at each and every NovaStar blow up. Gold knows the score. Reality dictates that the FED is going to sit there and get bitchslapped by whatever inflation comes our way. Thank you sir may I have another?

Gold smirks.

Want to talk re-acceleration? Gold knows that if the Fed tries to throttle inflation back down, they will launch a cascade of subprime lending implosions far beyond what we have already seen. And, if that were to occur, we might see it metastasize, spreading across the entire lending sector like an invasive economic cancer. So far, the sub prime disasters have been contained, like a large malignant tumor, confined to one small but significant section of the mortgage market. A few hikes and the entire disease could spread much further up the food chain.

Meanwhile, Gold futures edged higher earlier today, as rising crude-oil prices and a weaker dollar underpinned demand for the precious metal. Marketwatch reported that Gold for April delivery was last up $1.50 at $684.50 an ounce on the New York Merc. On Wedsday, gold closed at $684 an ounce, a seven-month high.

And the Fed? They are content to jawbone the markets.

All the while, Gold sits there, smiling.

Friday, February 23, 2007 | 11:00 AM | Permalink | Comments (67) | TrackBack (4)
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Comments

Great Post!

Posted by: Mike M | Feb 23, 2007 10:58:41 AM

Aren't we waxing poetic this morning. Must be that sweet scent of vindication.

Posted by: Charles Butler | Feb 23, 2007 11:00:30 AM

Apologies to Joseph Heller for the title of this post.

Posted by: Barry Ritholtz | Feb 23, 2007 11:13:19 AM

Awesome post.

Checking Harold Lederman's scorecard, it's currently 5 rounds to 2 in Gold's favor.

Posted by: joe | Feb 23, 2007 11:18:38 AM

Umm, ding. Ding!
DING! DING! DING!
Sayonara long commodities trade, you were great while you lasted!

Posted by: Ollie | Feb 23, 2007 11:31:41 AM

Speaking of lending, LYG out of London is getting hammered for announcing that bad debt charges are still rising.

http://www.marketwatch.com/news/story/lloyds-tsb-profit-rises-12/story.aspx?guid=%7B4231486F%2D225D%2D4CDF%2DAFC8%2D1D717622D4A3%7D&siteid=yhoo&dist=yhoo

Posted by: M.Z. Forrest | Feb 23, 2007 11:33:12 AM

"Reality dictates that the FED is going to sit there and get bitchslapped by whatever inflation comes our way."

Maybe not. Bernanke doesn't appear to be anyone's lapdog. I suspect he understands the role of the FED and the real danger of inflation.

In the Vietnam era we spent money without corresponding fiscal restraint; the late 70's/early 80's were no fun. In fact, action by the FED may be our best hope of keeping the Federal Government from spinning entirely out of control.

Posted by: edf | Feb 23, 2007 11:33:24 AM

Excluding inflation, there is absolutely no inflation.....nada....period, end of sentence. However, if you exclude inflation, with real wages of course then being flat and not negative, how much profits are there really for corporations ? Really....really,...... truly really?

Posted by: Teddy | Feb 23, 2007 11:41:56 AM

Gold knows something... maybe it has more to do with Iran than with Ben?

Posted by: agent00yak | Feb 23, 2007 11:49:28 AM

Wonderful post that aptly sums up what's going on in the market today.But for long I have been thinking that the biggest insanity is happening in the bond market and not equity market.How come bond players display such crass stupidity in driving down the yield when inflation is soaring is beyond me.May be it's all Saudi money who doesn't know where best to stash their oil riches away.Umpteenth time I keep hearing so-called-experts on CNBC ( unlike genuine ones like Barry Ritholz, Mark Faber, Jim Rogers etc ) babbling away how Fed can do wonders to the economy by cutting interest rate as if cutting Fed rate is the same thing as cutting long end rates.Even Inflation ex-Inflation is soaring and any further ease should theoretically push bond yields up ( Unless people love to lose money ) causing spike in mortgage rates.Have you been noticing how the MEW is slowing down as interest rate ticks up.No one wants to refinance at a higher mortgage rate than the old mortgage rate.MEW led to economic expansion and MEW contraction will eventually lead to economic contaction since
there is no scope for further busines spending boost.

Posted by: jagmohan swain | Feb 23, 2007 11:58:16 AM

"Gold smirks" is the surest sign of that commodity's top!

FADE-FADE-FADE !!!

The COT is massively bearish!

Seperately, the Put Call is just hysterical...and the Achilles heal for the bears.

Posted by: Fred | Feb 23, 2007 12:22:25 PM

I thought that I would have to wait much longer to hear this perfect summary of the situation: "Bernanke has been painted into a corner."

I suppose that he is furiously calculating which is the worst of two evils. Let it all crash now, while some of the credit can still be assigned to Greenspan, or wait and hope that the rest of the world takes the actions that they should which will then make it crash.

Bernanke is a smart guy with the weight of the world on his shoulders. There are so many metrics that look really bad at both the market and individual level, that his actions may define an unusually severe turn of events. And it may look like his fault, ironically. He should have turned down the job.

For example, if he raises rates one day and the next day Isreal hits Iran, we gonna have problems. The world has gone flat and we are in the corner with no rope to lean against.

Posted by: Rick Hanley | Feb 23, 2007 12:24:43 PM

I vote for a new name: "The Goldschlager Economy" Tiny flakes of real gold to mask the fact it tastes like crap.

Posted by: KirkH | Feb 23, 2007 12:28:00 PM

Bernanke is only 5'10" ??? Damn, we may be in trouble.

Posted by: jswede | Feb 23, 2007 12:28:49 PM

Interesting thing about some of the metals stocks

Some silver stocks are lower now than they were when SILVER waslower ie, SLW some much higher ie PAAS.

Some gold stocks are lower now ie NEM and GG..Some are higher ie HL and AUY...

Posted by: SINGER | Feb 23, 2007 12:39:45 PM

edf wrote: "In the Vietnam era we spent money without corresponding fiscal restraint; the late 70's/early 80's were no fun. In fact, action by the FED may be our best hope of keeping the Federal Government from spinning entirely out of control."

Uh, and we don't have that now? Or maybe that was your point!

Posted by: Damian | Feb 23, 2007 12:53:27 PM

Deeper concerns over subprime problems and Cheney's comments in an Australian newspaper saying they haven't taken any options off the table with respect to Iran which thus implies military action if diplomacy doesn't work are helping to boost bonds to the highs of the day and is taking the 10 yr yield to the lowest since Jan 9th. The yield curve inversion b/w the 3 month and 10 yr is now at 50 basis pts for the 1st time since Dec 5th of last yr.

Posted by: Peter | Feb 23, 2007 12:53:50 PM

Fantastic Post! It is also very funny and true!
Indeed, the Fed is full of it.

This is my favorite part:

"Gold thinks the Fed is full of crap, jawboning the markets with lies: That economic growth is robust, and about to reaccelerate, that inflation is 'contained'; That Housing has stabilized."

Posted by: V L | Feb 23, 2007 12:55:03 PM

Fred,
hmm...the COT is either bullish or extremely bullish on almost all commodities. Gold is slightly bearish, silver is neutral. In this secular bull market it has so far taken extreme short positions to turn gold. Even multiyear levels of shorting didn't stop the gold bull last year as it ran from $450 to $740. We have many, many years left of gold's secular bull run. I won't be selling any of my gold until I see the general public buying gold like they were buying real estate in 05.

Gary

Posted by: Gary | Feb 23, 2007 1:09:44 PM

Barry,

I have been reading your blog daily for about 2 years. This is my favorite post of all time!

Posted by: jab | Feb 23, 2007 1:09:51 PM

Uncle Ben knows full well he's in a catch 22. And he is doing what he thinks is best...Nothing at all. He's taking the middle road. Rates are where they would if the economy were stable and mostly operating in a generally inflation free environment. This is the way to control inflation. Set the target and let all the other variables smooth themselves out around it. You can't go chasing it by moving the target around. It's like paddle ball...One good jolt to get the ball moving and then you keep the paddle still...and sure enough the ball will come back to you.

In the mean time, while things are straightening themselves out. Expect to see gold high, a weak dollar, high oil, etc. It's going to take quite a while for all of these big gears to realign in the global machine.

Rates should have never moved in 2001. But I guess Greenie had to throw his banker buddies one more period of low rates to help out their credit spreads...and their pockets...one more time before he retired to get paid untold thousands on the lecture circiut.

Posted by: KP | Feb 23, 2007 1:13:50 PM

Tis the gold season.
We have another few more months before gold season winds down. Senior gold stocks are lagging but selective junior gold stocks are doing quite well.

Posted by: K-Dawg | Feb 23, 2007 1:19:26 PM

I agree that the Fed is going to be in a tough place very soon. Note however that inflation was still relatively high in 2001 when the Fed starting slashing rates, and we still (briefly) flirted with deflation. I do disagree with the notion that gold is still a financial asset in any sense. Why are people crawling all over themselves to pay $680 an once for an asset that has no yield, costs you to store, is currently being pulled out of the ground for about $200 an once, and the world has already stockpiled thousands upon thousands of tonnes of? If you really think the world financial system is going to collapse to the point of requiring a new gold standard, spend your money stockpiling ammo and canned goods, because you'll be wanting those a lot more.

Posted by: Turbo | Feb 23, 2007 1:33:01 PM

Turbo, if this country continues losing the good paying jobs to China and India with the quid pro quo of lower interest rates to "stabilze" the masses and power the financial assets forward, you better start saving for armored plates for your vehicles of choice since the suburbs in the latest reports have now more poor people than the cities.

Posted by: Teddy | Feb 23, 2007 1:54:56 PM

If the yields paid by financial papers are below inflation what good are those yields.One can create credit by the swing of pen if one is talking of paper money.The very fact that it takes $200 to dig gold out ( I am not sure if that figure is quite correct ) explains why Gold has been a great storage of value.Since the beginning of civilization gold has been and will continue to be the real money.The current
paper currency standard will come a cropper as the down side of business cycle unfolds itself.Though politicians and bankers would prefer paper currencies and will do whatever it takes to fight return to gold standards.

Posted by: jagmohan swain | Feb 23, 2007 2:07:24 PM

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