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Don't Doubt Bernanke's Ability to Create Inflation
 
With the Dow Jones now down 11% nominally from its high last month, NIA has been getting hundreds of emails and phone calls asking if there is any way we could be wrong about the threat of hyperinflation in the U.S. and if indeed deflation is the real problem we need to be worried about. The names Nouriel Roubini, Robert Prechter, and Harry Dent get mentioned to us a lot, with many NIA members asking why these so-called "experts" believe deflation is in our future.
 
Roubini, Prechter and Dent have been wrong about the overwhelming majority of their economic forecasts over the past decade. When it comes to their latest predictions about deflation, they will actually be right to some extent. We will see deflation in some assets like stocks and Real Estate, but only when priced in terms of real money - gold and silver. In terms of dollars, prices for pretty much all goods and services are guaranteed to rise dramatically over the next few years. Creating inflation is the only thing in the world Federal Reserve Chairman Ben Bernanke knows how to do and is good at.
 
During the past week, the mainstream media has shifted from saying we are experiencing an "economy recovery" to now saying we are at risk of a "double dip recession". Nothing fundamentally has changed in our economy. The fact is, the U.S. economy has been in a recession since mid-2000. All government reported positive GDP growth since mid-2000 has been due to nothing but inflation. Our economy should have experienced a depression in 2001 and an even greater one in 2008, but the depression has been temporarily avoided at the expense of an inevitable Hyperinflationary Great Depression down the road.
 
NIA believes it is impossible for the U.S. to experience price deflation when the Federal Reserve has held interest rates at 0% for the past 17 months. Sure, there will probably be a second wave of mortgage defaults that could cause another round of forced liquidations on Wall Street, but during any future period of forced liquidations, we doubt the U.S. dollar will still be looked at as the "safe haven" it was in 2008/2009. Gold and silver will soon be looked at as the only real safe havens because they are the only assets that provide protection from both a deteriorating economy and massive inflation. Precious metals will decouple from the Dow Jones and we will begin to see gold and silver rise at the same time as the stock market falls.
 
Bernanke was questioned yesterday following a speech at the Bank of Japan about whether a 4% inflation target would be better than the Fed's current inflation target of 2%. Bernanke responded that "it would be a very risky transition" if the Fed changed their inflation target, claiming that U.S. inflation expectations are currently "very stable". (NIA estimates the real rate of U.S. price inflation is already north of 5%.)
 
Unfortunately, no policymaker in the world is smart enough to accurately control the rate of price inflation through the manipulation of interest rates, and certainly not Bernanke. It's mind-boggling to us how the mainstream media could believe anything Bernanke says about inflation after how wrong he has been about everything else. Maybe the press has already forgotten that it was Bernanke who in July of 2005 said, "it's a pretty unlikely possibility" that home prices will decline across the country, "house prices will slow, maybe stabilize but I don't think it's going to drive the economy too far from its full employment path". We are 100% sure that Bernanke will be proven wrong again when it comes to inflation.
 
The U.S. Dollar Index has rallied from 75 to 87 since December and is approaching its high from March of 2009 of 89. This has given Bernanke the cover to keep interest rates at a record low 0%, but NIA believes Bernanke is misreading these economic signals. When the U.S. Dollar Index reached its high last year of 89, gold was only $900 per ounce. Today, gold is approximately $1,200 per ounce. The fact that gold has held up so strong despite a rapidly rising U.S. Dollar Index, proves that our financial system is getting ready to overdose on excess liquidity. The U.S. Dollar Index has rallied only because it is heavily weighted against the Euro. The Euro is now overdue for a huge bounce, which we believe will send the U.S. dollar crashing while sending gold to new record highs.
 
It's not good for us to pay too much attention to short-term volatility in the financial markets. Short-term "noise" often causes investors to second guess what they know is true. In our new documentary 'Meltup' (which has now surpassed 441,000 views in 10 days) we said, "If stocks were to see a nominal decline one last time, we will likely see Bernanke shoot up his largest ever dose of quantitative easing, which could turn the current Meltup into hyperinflation."
 
We are seeing signs of this coming true already. Washington is now calling for another stimulus. Larry Summers, senior economic adviser to President Obama, has asked Congress to begin drafting a new stimulus bill in an attempt to prevent a "double dip recession". The proposed size of this new stimulus is so far only $200 billion, much smaller than the last $787 billion stimulus bill. However, we are sure Congress will increase the size of it, especially if stocks continue their nominal decline. The new stimulus bill will likely coincide with trillions of dollars in additional quantitative easing by the Federal Reserve.
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Gold Futures Extend Rally on Demand for Haven; Silver JumpsMay 07, 2010, 2:42 PM EDT By Pham-Duy Nguyen

May 7 (Bloomberg) -- Gold rose to a near record in New York, capping the third straight week of gains, as Europe’s fiscal crisis spurred demand for the metal as a haven. Silver jumped the most since November.

The MSCI World Index of equities dropped to a three-month low on speculation that Europe’s debt crisis will spread. Gold advanced to as high as $1,214.90 an ounce, 1 percent below the Dec. 3 record, after the Dow Jones Industrial Average yesterday had the biggest intraday loss since the market crash of 1987.

“Gold is the first level of safe-haven appeal,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “There’s a lot of fear out there, and who knows where the next shoe will drop? People want to be in something tangible coming into this weekend.”

Gold futures for June delivery rose $13.10, or 1.1 percent, to $1,210.40 an ounce on the Comex in New York, for a 2.5 percent increase this week and a 10 percent advance for this year. The all-time high is $1,227.50.

The Group of Seven is holding a conference call today to discuss Greece’s debt risks following the plunge in global equities.

“People are nervous about what’s going on in the rest of the world,” said Michael Cuggino, who manages $6 billion in the Permanent Portfolio fund, which includes a 20 percent holding in bullion. “It’s a safe bet that the bigger the problem is in Europe, the larger the impact it will be on the U.S. economy.”

‘Financial Turmoil’

The Standard & Poor’s 500 Index dropped as much as 3 percent today, and the bonds of debt-laded nations in Europe tumbled.

Gold “does well in periods of financial turmoil, so it is good to have some just in case,” said Barry James, who helps manage $2 billion at James Investment Research in Xenia, Ohio, including a 5 percent allocation in exchange-traded funds in bullion and mining stocks.

The euro rose as much as 1.4 percent against the dollar and fell as much as 0.3 percent. The 16-nation currency tumbled 5.1 percent in the previous four sessions.

“It’s a flight to safety against these wild currencies,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “Gold being the international currency is the most stable environment now.”

Gold priced in U.K. pounds and Swiss francs climbed to records today. The metal denominated in euros reached an all- time high yesterday.

Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, yesterday jumped 19.78 metric tons to a record 1,185.79 tons.

Demand for gold bars and coins was “exceptionally strong” yesterday, notably in Germany this week, UBS AG said in a report.

Silver Rally

Some investors purchased silver because gold is too expensive, analysts said. “Silver is the poor man’s gold,” said Klopfenstein of Lind-Waddock. “If people want a true safety instrument, they should be in gold.”

Silver futures for July delivery rose 93.6 cents, or 5.3 percent, to $18.451 an ounce, the biggest gain Nov. 16. Today’s rise helped silver narrow its loss for the week to 0.5 percent.

“Silver’s cheap,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “It got hammered earlier this week and Europe just came in and scooped it all up.”

Platinum futures for July delivery dropped 70 cents to $1,665.80 an ounce on the New York Mercantile Exchange, narrowing the week’s loss to 4.5 percent. Earlier, the metal fell as much as 1.3 percent.

Palladium futures for June delivery fell $3.90, or 0.8 percent, to $510.20 an ounce, capping an 8.2 percent loss for the week. It was the biggest weekly decline since early March.

--With assistance from Nicholas Larkin in London. Editors: Michael Arndt, Daniel Enoch.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net