Bernanke Determined to ‘Protect’ US Economy

Bullish US retail sales figures for January and “hours worked” stats for the last quarter encouraged further gains in stocks commodities yesterday. The $82bn Glencore/Xstrata merger and the chatter surrounding the Facebook IPO are also helping sentiment, with many no doubt hoping that this is indicates it’s “business as usual” at the financial markets. Precious metals continue to benefit from the move away from the perceived “safety” of the US dollar, with the gold price breaking above resistance at $1,750 and silver temporarily moving above $34.

Not coincidentally, the rise in gold and silver yesterday coincided with a press conference given by Federal Reserve Chairman Ben Bernanke, who once again emphasised his determination to “protect the US financial system and the economy” from the problems in the eurozone. Many will of course correctly interpret this as meaning that the Fed stands ready to inject more new money into the financial system in the event of trouble.

In an attempt to assuage critics who are worried about the possible inflationary consequences of current Fed policies, Bernanke noted that, "we (the Fed) are not seeking higher inflation. We do not want higher inflation and we're not tolerating higher inflation." However, as GoldMoney’s Alasdair Macleod argued in his last article, the fact that the Fed is now targeting a 2% inflation rate on the Personal Consumption Expenditures Price Index – an index which generally gives inflation readings a third below the Consumer Price Index – would indicate that the Fed is in fact targeting higher inflation.

Many will also be interested to learn that, as Barclays noted recently, under the Fed’s “Operation Twist” programme – whereby the Fed buys long-dated US government debt in exchange for sales of short-dated US Treasury debt – the Fed has monetised 91% of the gross issuance of 20-30 year US Treasuries. Remember this when you hear people talking about how US debt “isn’t a problem” because people are still desperate to buy “safe haven” Treasuries.

ZeroHedge also carries an article linking to Morgan Stanley’s prediction of the EURUSD dropping to $1.15 by the end of the year. In Morgan Stanley's view:

“The relative expansion of the ECB’s balance sheet is EUR bearish in our view....the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained. We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR”.

If the euro gets anywhere near $1.15, it’s a racing certainty that the Fed will move to implement either “QE3” or nominal GDP targeting. In which case, a $2,000+ gold price is not far off.