Ben Bernanke Can’t Stop The Gold, Silver,Oil Speculation

Apr. 30 2011 - 2:36 pm

The Fed chairman is  between a rock and a hard place.  He can’t raise interest rates to stop the dollar’s descent, because higher interest rates will damage the already weak recovery.  So, he is forced to keep money cheap to help stimulate activity– which is the fundamental force driving stock prices– and the hottest commodity prices higher. It’s a win-win for macro hedge funds using leverage.

So, he is faced with  a quandry.Unsold homes, mortgage foreclosures, lower household wealth,  high unemployment, modest income growth, are between the rock and the hard place. As the dollar keeps weakening, gold, silver and oil keep strengthening. Gold  has madly rushed to $1556.40 an ounce, without any real correction. Oil prices  are up 7.3% in April as speculative fervor in the futures market recognizes the repeat of a classic momentum trade. Silver is getting ready  to make its final push through $50 an ounce just as the regulator and market participants are madly raising margin requirements.

We are closing in on mania in silver, and growing conviction gold and oil will protect your out that relationship for a moment or two.loss of value in the dollar. In otherwords, the price of easy money stimulation is a falling price of the doillar and a rising  prices of gold, silver and oil. This is what the Chairman calls “transitory” inflation.” And it’s coming as the result of the Fed adding $3.8 billion  a day  to its  balance  sheet , according to Comstock Partners, Inc. in an April 28 market comment. Federal Reserve Bank credit is up 38% the past 3 months, while stocks are up only 8% , oil over 20%, and gold 10%.  Think about that relationship for a moment or two. When the Fed balance sheet finally is reduced– Bernanke’s  not saying when– there will be  speculators running forthe exit.

So, my rule of thumb is: as long as the Fed balance sheet rises and the dollar keeps  declining—   hot money, fast money into stocks, gold and oil. My quick thinking pal, Barry Ritholtz, shifted from a 30% long pposition to 90% as the market momentum kept surprising him. His latest shrewd  BA, Boeing, CBOE, Chicago Board of Options Exchange(lot of action out there),and  HSY, Hershey.