Saturday, February 11, 2012
Ben Bernanke is Every Gold Bug's Best Friend.
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years (till 2014), gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.