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Bernanke the New Federal Chairman -  inheriting a time bomb!

By all accounts a brilliant man and enormously competent.   A man described as being focused on inflation and in favor of targeting inflation ‘bands’.   With this policy comes the downgrading of the importance of the $’s exchange rate, as many experiences across the world have shown.

But Greenspan was pro-gold at the start of his reign and then he had to deal with the situation at hand.   Mr Bernanke will have only a short time to move from imposing his beliefs of Fed policy to reacting to crises he has to face.   In this he has less presence, fewer connections and less power than Greenspan had.   So let’s not expect him to succeed where Greenspan did not.   Persuading the government to handle mortgage lending and the dangers therein, or restraint on the Budget deficit will likely be out of his reach.   As to his ability to affect the U.S. $’s exchange rate that too will be less than Greenspan’s. [Greenspan in reality tended to ignore it, it seems] 

What Mr. Bernanke will have to face on the international front, which is where our concern lies, is the impact of inflows on the Capital account, holding long rates down, whilst short-term rates are still rising.   Short-term rises are a result of the U.S. economy’s internal situation, whereas Capital inflows are the result of the external [international] presence of the U.S. in the global economy.   If Capital inflows wane to the point they are less than the Trade outflows, U.S. long rates will rise, of themselves.    As we described above, such a crisis could be brought on this year, by the pricing of oil.   Until then expect the demand for the $ to grow alongside the $ oil price.

Mr Bernanke will face situations Mr Greenspan was spared.   Should the housing bubble bust we will not see just a housing crisis.   We will have a ‘domino effect as one crisis leads to the next then to the next.   The potential collapse of the housing market – credit - consumer spending and then ‘confidence itself will lead to the entire economy itself and will be quick and massive, putting the same need for dramatic action onto Bernanke that Volker had to face to contain inflation! 

Because of the past any crisis that bursts upon the U.S scene will have a dramatic content far outweighing those that Greenspan had to face.   Greenspan’s days were quiet compared to those Bernanke has to face.   But then Greenspan and the governments of the last 20 years sowed the wind and Mr Bernanke will have to cope with the whirlwind.   How good a defender in the face of such storms, will be the measure of the man.   We think he will have to form part of a team fused with the government, to contain the dramas leaving his independent role under constant threat from the government of the day.

We will have to see in those situations whether the saying, ‘come the hour, come the man’, comes true?

Russia – Teasing or Serious?

 Russian President Vladimir Putin seems to be becoming a friend of gold in Russia.  

·         This week he supported a proposal to cut the V.A.T. on purchases of gold ingots (up to 1 kg) by Russians. "Tax cuts, primarily VAT, for Russian citizens who purchase precious metals and invest in them are worth considering," he said in response to a proposal made by Russia's Polyus gold mining company to cutting V.A.T. from Russian gold prices.    This was after the Polyus President Yevgeny Ivanov said gold could become an alternative investment tool for Russians together with the U.S. $ and the € but, the 20% V.A.T. on ingot purchases still stood in the way.   

·         Putin has also supported Ivanov's proposal to issue licenses for mining companies allowing them to work on foreign markets.

·         It is unacceptable to have gold ore processed abroad, he said, "There are things that I consider to be unacceptable for us, and shipping gold ore abroad to be processed is one of them. We see neither taxes nor gold here. This can't happen,"

No doubt about it, if Russians have a V.A.T. free market in gold, the volumes invested in that country in gold will rise to much higher levels, all of which will be new demand.   It makes a great deal of monetary sense to have your citizens invest in gold as well as governments in difficult days.    But let’s see it happen before we take it as a reality.