As the gold price closes in on $1,100 per ounce, setting another all-time high today, and gold mining stocks receive increasing fund flows from investors seeking leverage to the price of gold, there are renewed worries that Chairman Bernanke is fueling another round of asset bubbles. The two-day Federal Open Market Committee (FOMC) concludes today and while no change in interest rates is expected, there has been much debate in recent weeks as to whether the Fed will alter its policy stance that rates will remain low “for an extended period of time.” There has been speculation that a contingent of Fed governors, notably Federal Reserve Bank of Philadelphia President Charles Plosser, is worried that inflation expectations are becoming unanchored. While price inflation has been tepid, there has been striking asset price inflation over the past six months. Equities, commodities, and the gold price have all continued their ascent since the dark days of the March lows. The gold price is now up over $200 per ounce in 2009. Equity markets have risen across the globe, with emerging markets posting huge 2009 gains; China’s Shanghai, Brazil’s Bovespa, and India’s Sensex are up 71%, 66.8%, and 59.7% respectively. The Reuters-Jefferies CRB index has risen 20.5% year to date while crude oil is up a huge 78.5%. Adding yesterday’s $26.00 rise in the gold price, the price of gold has now risen 22.7% this year as investors lose confidence in the integrity of global currencies. Gold mining stocks posted one of their strongest performances of 2009 yesterday, with the Philadelphia Gold and Silver Index (XAU) rising 6.4%, extending its year-to-date gains to 35.9%. Chairman Bernanke is widely regarded as an expert on the Great Depression and has repeatedly emphasized the importance of keeping the financial system unclogged, even at the expense of unintended side effects. Bernanke has emphasized that what happens on Wall Street has a deep impact on Main Street - hence if rescuing the middle class from the credit crisis produces bloated stock prices, then so be it. The extraordinary policy measures that have been undertaken to stimulate private demand have been unprecedented. Slashing interest rates to near zero and monetizing government debt as part of a $1.25 trillion quantitative easing program has been the epicenter of monetary policy. In conjunction with Congress and the Obama administration, these policies has been part of a grander attempt to promote private sector demand through lowering mortgage rates, providing tax credits to new home buyers, passing a $787 billion stimulus program, and finally, the famed “cash for clunkers” initiative. The chorus of critics is growing that promoting consumer spending at a time when balance sheets are already under duress will both compound the problem and lead to a more severe deleveraging at some point in the future. The final and potentially most important side effect of Chairman Bernanke’s policy actions is a plunging U.S. dollar. Rising gold prices are signaling that investors across the globe are worried that the purchasing power of their nations’ currencies will erode in the future. Saddled with a $1.4 trillion budget deficit, growing national debt, and over $50 trillion of unfunded liabilities, the balance sheet of the America mirrors that of many of its debt-burdened private citizens. Just as the credit rating of individual citizens declines as their debt level rises, the same applies to sovereign nations. While calls for a dollar crisis look far-fetched at this time, a rising gold price is signaling declining confidence in fiat currencies. It is not solely private citizens that have increased their gold holdings. Yesterday the International Monetary Fund (IMF) announced that the Reserve Bank of India purchased $6.7 billion, or 200 metric tons, of gold directly from the agency. India increased its gold hoard by 55%, and became the most recent nation, following China and Russia, to diversify its foreign exchange reserves away from U.S. dollars and other fiat currencies into gold bullion. If Chairman Bernanke and the FOMC continue to signal that a crisis-driven monetary policy will reign indefinitely, then equities, commodities, and gold will continue to move higher - and a new chapter in the long history of asset bubbles will be written.

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