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Gold Knows

Posted By Barry Ritholtz On February 23, 2007 @ 11:00 am In Economy,Federal Reserve,Inflation | Comments Disabled

A grudge match of epic proportions has been developing. Like Ali and Frazier, these two pugilists have been taunting each other, name calling, daring their counterpart to step into the ring and get the beating they so richly deserve.

This championship match, the Thrilla in Manilla, the Rumble in the Jungle can no longer be avoided. The contestants are fit and well-trained, the crowd is growing restless, the bets have been placed. Let the battle begin!

In this corner, weighing 195 pounds, standing 5 foot 10, hailing from Washington D.C. via Harvard, MIT and Princeton, New Jersey, wearing the M1 green trunks, the Charlemagne of Currency, the prince of paper, the bearded bard of the Fed, monarch of monetary policy, Benjamin GOLDILOCKS Bernanke!

And in the opposing corner, weighing 2046 metric tonnes — one ounce at a time — the shiny, precious, storehouse of value,  the standard for monetary exchange, the most malleable and ductile of the known metals, that master of disaster, hailing from most of the world, that dense, soft, shiny, yellow metal, GOLD.

The battle between these two titans has become increasingly loud and volatile as of late. Bernanke, a former inflation Hawk, recently went all Lovey Dovey: He now believes there is "growth with ebbing inflationary pressures and a stabilizing housing market."

When Gold heard this, it laughed out loud, calling the Fed Chair out for such nonsense. Gold dissed Bernanke: "I know what you fear" taunted the metal. "You’re afraid of the drag on growth while inflationary pressures are building and the subprime implosion is threatening the system."

Gold knows. It knows Bernanke has been painted into a corner, hamstrung by his predeccessor, Easy Al. Even if inflationary pressures spike upwards, Gold knows Ben cannot raise rates. Gold know what’s been goin’ down in the subprime market. Gold’s sees his buddy Oil (aka Black Gold) at $61 bucks.

Gold know that the slowing economy would not absorb more rate hikes particularly well. Gold also knows that the FED can’t throw the economy a lifeline by easing, either. Gold thinks the Fed is full of crap, jawboning the markets with lies: That economic growth is robust, and about to reaccelerate, that inflation is "contained;" That Housing has stabilized.

Gold laughs its arse off at each and every NovaStar blow up. Gold knows the score. Reality dictates that the FED is going to sit there and get bitchslapped by whatever inflation comes our way. Thank you sir may I have another?

Gold smirks.

Want to talk re-acceleration? Gold knows that if the Fed tries to throttle inflation back down, they will launch a cascade of subprime lending implosions far beyond what we have already seen. And, if that were to occur, we might see it metastasize, spreading across the entire lending sector like an invasive economic cancer. So far, the sub prime disasters have been contained, like a large malignant tumor, confined to one small but significant section of the mortgage market. A few hikes and the entire disease could spread much further up the food chain.

Meanwhile, Gold futures edged higher earlier today, as rising crude-oil prices and a weaker dollar underpinned demand for the precious metal. Marketwatch reported that Gold for April delivery was last up $1.50 at $684.50 an ounce on the New York Merc. On Wedsday, gold closed at $684 an ounce, a seven-month high.

And the Fed? They are content to jawbone the markets.

All the while, Gold sits there, smiling.


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