gold and silver

I first thought U.S. Federal Reserve Chairman Ben Bernanke was being deceitful when he denied the existence of inflation - but now I'm beginning to think he's simply delusional.

Anyone who watched or listened to Bernanke's Oct. 4 congressional testimony must have reached the same conclusion.

"Persistent factors continue to restrain the pace of recovery," Bernanke said. Then the Fed Chairman promised to consider yet more stimulus "to promote a stronger economic recovery in a context of price stability."

The irony, of course, is that we don't actually have price stability, but Bernanke refuses to believe this - thus the added stimulus. And that says nothing of the fact that the first $2 trillion of "stimulus" did little or nothing for the overall economy.

This is the same kind of delusion that led the Fed Chairman to proclaim in 2007 that the "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

So, with a delusional central bank chairman, an anemic economic recovery, and every indication that prices across the board will continue to soar higher, there's really only one place to put any loose change you have lying around: gold and silver.

Bernanke's Blunder

Back in May, I said gold and commodity investments were attractive for two primary reasons:

• First, global monetary policy was - and still is - very stimulative. Commodities, especially gold, tend to do very well when interest rates are well below inflation.
• Second, rapid growth in emerging markets has created a new wave of middle class consumers. Those new buyers are increasing demand - and therefore prices - for industrial commodities.

Of course, following the market turbulence of the past few months, the picture has changed somewhat. While growth in China and other emerging markets remains quite rapid, it appears to be slowing a bit. That has dented demand for industrial commodities. Prices have dropped as a result. Copper, for example, has fallen to about $6,900 per metric ton, from more than $10,000. However, unless the emerging market economies go into a full-blown recession - and I don't expect they will - I would anticipate some recovery here.

On the other hand, monetary policy has gone in the opposite direction - becoming even more stimulative. Bernanke intends to keep short-term interest rates near zero until mid-2013 and he's undertaken a $400 billion "Operation Twist" program to bring down long-term interest rates. Both of these measures have increased monetary stimulus at a time when inflation is already running close to 4%.

That brings us to this week, when Bernanke decried the progress in the economy and indicated that the Federal Open Market Committee (FOMC) would consider even more monetary stimulus - even though three of the group's members are solidly opposed to the idea.

$5,000 Gold - $150 Silver

So far the only thing the Fed's loose monetary policy has succeeded at doing is pushing gold and silver prices steadily higher.