Let me clarify something
In my last entry I commented on higher gold prices helping to "unanchor inflation expectations" thereby causing the Fed to raise interest rates. I need to clarify what I meant.
Let me start by saying that I do not believe the Fed will raise rates for a looooonng time. In fact, they've made this abundantly clear. This is a Bernanke policy that he believes will be effective, and in fact has telegraphed it in many speeches, some even before this crisis began. Rising gold prices will not change that.
What they're looking at, and rightfully so, is slack in the economy. We have industrial production at multi decade lows and unemployment at multi decade highs. There's lots of unused capacity that would absorb any demand driven inflation. He won't consider tightening until that situation reverses somewhat.
However there are some on the FOMC who are likely to be interested in some of the other inflation metrics they follow. One is the money supply statistics, another is the price of gold and another would be inflation expectations. Of these, I believe inflation expectations is the one they overweight. This is because they feel people will act based on their expectations, and the Fed is all about crowd control.
Higher inflation expectations leads to serious tightening discussions on the committee. Dr. Bernanke wants none of that at this time. He needs everyone fully on board the deflationary band wagon. Higher gold prices could upset the wagon by causing the financial news media to scream "inflation, inflation, inflation". The public hears that. If it then shows up in their surveys as higher inflation expectations, he has a fight on his hands with some on the committee.
That is why I feel that a pre-emptive attack on gold, perhaps causing a failed breakout, could be a possibility as it removes the inflation talk from the airwaves. THAT is what I was trying to say. I hope I've been clear.
As a side note let me say that yes, I am aware that the FOMC wants some inflation in the system. They just want to control it's emergence on their schedule.
As far as stocks, the rally looks good so far, but I'm paying very close attention to tomorrow watching for a reversal before 1080 is taken out.
Let me start by saying that I do not believe the Fed will raise rates for a looooonng time. In fact, they've made this abundantly clear. This is a Bernanke policy that he believes will be effective, and in fact has telegraphed it in many speeches, some even before this crisis began. Rising gold prices will not change that.
What they're looking at, and rightfully so, is slack in the economy. We have industrial production at multi decade lows and unemployment at multi decade highs. There's lots of unused capacity that would absorb any demand driven inflation. He won't consider tightening until that situation reverses somewhat.
However there are some on the FOMC who are likely to be interested in some of the other inflation metrics they follow. One is the money supply statistics, another is the price of gold and another would be inflation expectations. Of these, I believe inflation expectations is the one they overweight. This is because they feel people will act based on their expectations, and the Fed is all about crowd control.
Higher inflation expectations leads to serious tightening discussions on the committee. Dr. Bernanke wants none of that at this time. He needs everyone fully on board the deflationary band wagon. Higher gold prices could upset the wagon by causing the financial news media to scream "inflation, inflation, inflation". The public hears that. If it then shows up in their surveys as higher inflation expectations, he has a fight on his hands with some on the committee.
That is why I feel that a pre-emptive attack on gold, perhaps causing a failed breakout, could be a possibility as it removes the inflation talk from the airwaves. THAT is what I was trying to say. I hope I've been clear.
As a side note let me say that yes, I am aware that the FOMC wants some inflation in the system. They just want to control it's emergence on their schedule.
As far as stocks, the rally looks good so far, but I'm paying very close attention to tomorrow watching for a reversal before 1080 is taken out.
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