By Peter Schiff

During his testimony before Congress this week, Ben Bernanke didn’t hesitate to opine on a number of topics that had very little to do with his mandate as Fed Chairman. The wealth gap, racial factors in income inequality, and the impact of capital gains tax policy were all fair game.  But when queried about the one issue where his impact is unrivaled, the value of the U.S. dollar, the Chairman quickly passed the buck to the Secretary of the Treasury. Conveniently, the Secretary was nowhere in sight.
 
This should come as a surprise to no one, but the Fed sets monetary policy in the United States. The last time I checked, money in the United States is the dollar. Therefore monetary policy is in fact dollar policy. The supply of dollars is regulated by the Federal Reserve, with ostensibly no interference by the Federal government. The Fed also independently sets short-term interest rates, which are a huge factor in determining the dollar’s value. In other words, the Fed controls both the supply of and yield on dollars. Bernanke claims to be worried about inflation, yet will say nothing about the value of the dollar. Prices rise as a result of the dollar losing value. How then can he ignore the persistent weakness in the dollar and refuse to comment on its effects on domestic inflation?

Why defer to the Secretary of the Treasury? Other than signing the bills, what does he have to do with monetary policy? As a member of the Cabinet, the Secretary’s job is to advise the President on economic matters, manage the finances of the United States, help plan the budget and oversee appropriations. He has no control over either money supply or interest rates. That power was delegated to the Fed in 1913. Potentially, the Treasury Secretary could authorize using our meager foreign exchange reserves to buy dollars, but given our limited bank account of foreign currency, such intervention would be more embarrassing than effective. There is literally nothing the Secretary can do except repeat the useless mantra “A strong dollar is in our national interest.” 
 
Another interesting exchange occurred when a Congressman asked Bernanke what he would tell his Chinese counterpart in order to help convince the Chinese government that an appreciated yuan was in China’s interest. First, Bernanke noted that a free-floating yuan would enable China to pursue an independent monetary policy. Unburdened by the need to print yuan to buy U.S. dollars, China could end the domestic inflation which is now causing Chinese consumer prices to rise and which has caused the formation of asset bubbles. The Chairman neglected to mention that if this were to occur, China’s retreat from the U.S. Treasury bond market would send interest rates in this country significantly higher.

Second, Bernanke correctly stated that a higher yuan would create additional purchasing power in China, resulting in a higher percentage of China’s resources being devoted toward satisfying domestic rather than foreign demand. The Chairman neglected to mention however, that such a re-allocation would result in fewer exports to the United States and higher prices for American consumers.

So if China actually adopted Bernanke’s suggestions, the result in America would be that both consumer prices and interest rates would rise. For someone who claims to be worried that inflation will fail to moderate or that the subprime problems might spread to the overall housing market and the economy, it seems odd that Bernanke would encourage China to take steps that significantly raise the likelihood that both scenarios occur simultaneously.

Finally, Bernanke dismissed concerns about the wisdom of favoring core inflation over headline by asserting that oil prices will soon moderate. Considering that oil prices rose another 2% during his two-day testimony, and that he and his predecessor have consistently underestimated oil prices for years, what now makes his crystal ball any clearer? Also during his two-day testimony the dollar fell to new lows against most currencies and gold prices rose $15 dollar per ounce. Bernanke may claim that inflation is under control, but $76 dollar oil and $670 gold suggest otherwise.

For a more in depth analysis of the tenuous position of the American economy and U.S. dollar denominated investments, read my new book Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)”

Visit Peter Schiff’s Website

Gold and Dollar Market Summary, July 18th, 2007

Author: Jim Sinclair

Dear CIGAs,

You simply must have gold.

As you can see from the mast head of JSMineset, gold is the standard because there simply isn’t much of it. Alchemy in real terms is nothing more than an entertaining joke distributed for a laugh from the people at www.GATA.org. As a realistic possibility alchemy has to be at the bottom of the barrel of disinformation.

The US dollar is in miserable condition even though the Exchange Stabilization Fund did show within that five minute window of opportunity we pointed out earlier this morning. Is that a coincidence? Probably.

All the King’s horses and all the King’s men cannot put the Humpty Dumpy Dollar back together again, but they sure are trying. The dollar is trading now at .8025 as the Exchange Stabilization Fund funded by the US Treasury who is in turn funded by the Fed is doing everything possible to get the buck back to .8031. The problem with the heroic attempt is you have to keep it there. Keeping it there means you have to clean out the offerings in the cash market not only now but repeatedly, which is simply not possible.

The only way to support the dollar is to sell the hell out of it then use OPM for support. The other means is to spread it in a huge way to operate the spread just as is done in the equity indices to support that. The rub in this tactic for the US dollar is that you would have to cream it to help it and that is contra-productive. So far no real effort has been made to play the market to support the dollar. That is what makes it quite hard to start now. For this reason I do not see the present effort to hold that line (.8030) as a successful strategy.

We live in a world without restraints, almost without ethics, hateful people almost everywhere and no standards at all. This is enough of a reason to own gold. It is limited in quantity and becomes a currency when the previous reserve currency fails. The demand for gold will without any doubt rise. The supply cannot rise in any meaningful way. Therefore the price of gold must rise. It is that simple.

US paper is in trouble as senior paper is US and worldwide bonds, not necessarily equities. The sub prime debt level is following economic law we spoke of before. That is any level of debt, be it the lowest, will impact all levels of debt, even the best.

This then begins to fill in the final pillar that sustains the generational bull market in gold.

This Pillar is taking form as the awful number $666 is breached. Maybe the number has something to do with the COT boys.

Bernanke Confirms the Formula:
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Today we saw the O.N.S. (Office of National Statistics) release the C.P.I. and the R.P.I. for the month of June. The C.P.I. or the consumer price index came out at a 2.4% year on year rate and actually dropped from 2.5% in May but the financial markets were expecting a drop to 2.3%, while the R.P.I. or the retail price index came out at 4.4% year on year which was on the back of an expected decrease from 4.3% to 4.2%. Short sterling futures, which reflect expectations of three month deposits, dropped across the board. A one basis point decrease in the futures price represents a one basis point increase in expectation of three month sterling deposits. The September 2008 futures dropped from 93.68 to 93.61 and is therefore discounting a rate of 6.39% for September of next year.

Tonight’s Evening Standard’s front page story says: “Soaring prices in shops mean rates are certain to hit 6% soon” and it goes on to say that economists now think another rate hike by the Bank of England is almost certain and that it could come in August. We have noticed that most economist have been underestimating how far the Bank of England will need to raise rates. In an article in March this year Victoria Marklew, an economist at The Northern Trust Co., said the following: ” So, where does all this lead interest rates? The prospect of one more rate hike in April or May has dimmed a little but not disappeared. In its February Inflation Report the BoE concluded that inflation would be slightly above the 2.0% target in two years time if the repo rate stayed at 5.25%. And while the MPC seems to be feeling more sanguine - even the two most hawkish members voted to stay on hold this month - they are not yet ready to rule out the need for additional tightening.” Another article in the FT on the 4th of June carried the following quote from Robert Lynch at HSBC: “UK interest rates are seen staying at 5.5 per cent, even though inflation concerns remain prominent following recent data pointing to the increased pricing power of British companies. Interest rate futures suggest another quarter-point increase to 5.75 per cent is likely by August.” We are now in July and the BoE has already raised rates (June) to 5.75% and 6% is expected in August!

We at ForSoundMoney think it is very important to follow money supply growth as inflation is the growth of the money supply which leads to rising prices of goods and services. In the U.K. the broadest measure of inflation or the money supply is the M4. We have warned our readers in the past that it is imperative that the Bank of England do whatever is necessary to keep money supply growth under control. We think the Bank of England has lost control of inflation and that the only way it can bring it back under control is through much higher interest rates than we have got at present (5.75% BoE rate). Check out the chart below and notice how the last time the M4 growth rate was hovering around 14%, like it is now, how the 10 year Gilt yield was around 10% and the R.P.I. was also at 10%.

Watch Ron Paul, the sound money candidate for President, answering questions from Google employees.

By Peter Schiff

As the Japanese government continues holding short-term interest rates near zero while printing yen like it is going out of style, getting out of the yen has now replaced pachinko as the national pastime for rank and file Japanese.  With housewives and cab drivers debating the best techniques to exchange their yen savings for higher yielding non-yen assets, the Japanese monetary authorities are facing the prospect of the complete destruction of their own currency, subjecting their citizens to the horrors of hyperinflation.
 
For years, the storied efficiency of the Japanese economy has kept its citizens from understanding just how much purchasing power they were losing to inflation.  As the extremely productive Japanese economy worked to lower consumer prices, the inflationary monetary policy of the BOJ reversed those declines, robbing Japanese consumers of the benefits of falling prices. This loss represents a massive subsidy to American consumers.
 
However, inflation is about to get so out of control in Japan that prices will soon rise despite the natural forces that would otherwise have lowered them. As rising prices become impossible to ignore, perhaps the Japanese will borrow a page from the U.S. playbook and recalculate their CPI to hide the grim reality. However, with the carry trade kicking into high gear, such propaganda efforts will likely not succeed.
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The share price of Newmont Mining, the second biggest gold minig company in the world, recently touched an almost two year low of $38.08 on the 27th of June. This was the lowest level for NEM (ticker symbol) since August 2nd, 2005! It also marked a very significant drop from the high of $62.72 reached on January 31st, 2006. It would seem that Newmont Mining’s share price has no future and that the gold mining sector is not the place to be at the moment but if one looks at the bigger picture it is possible that what we have witnessed in the last sixteen months is nothing more than a gut wrenching correction in a long term bull market. It happened in the mid 1970’s when the price of gold dropped from around $200 in 1975 all the way down to around $100 in 1976 before it started its ascent to $887.50 in January of 1980!

The first chart below shows the fibonacci retracement in the Newmont share price since the beginning of its bull market in October 2000. Newmont bottomed at $12.75 in October 2000 and traded all the way to $62.72 in January of last year. As can be seen NEM failed to hold the 38.2% retracement of the above-mentioned move. We think, nevertheless, that the recent low at $38.08 is near enough the 50% retracement of $37.735 to probably point to a probable low.

The second chart shows a falling wedge formation which is usually a counter trend corrective move in a bull market. If NEM holds the $37.75/$38.00 area and goes on to trade above ( above the $43/$45 level) the white trend line of the falling wedge in the next couple of months or so it could be pointing to a new leg up in the gold mining sector bull market.

1stChart

2ndChart

Charts from Bloomberg.