Gold Sets New All-Time Highs

by Peter A. Grant

March 02, a.m.
(from USAGOLD.com) --

Gold continues to probe into uncharted territory after initially taking out the all-time high from early-Dec at 1430.88 on Monday. Silver is closing in on $35 as as anti-government protests in Libya seem to be morphing into all-out civil war. Muammar Gaddafi said today that the Mediterranean oil pipeline was in jeopardy if Libya becomes unstable. I think that horse is already out of the barn and oil prices are reacting accordingly. US Defense Secretary Gates said this morning that establishing a "no-fly" zone in Libya would have to begin with an attack on the country, adding further impetus to the bid in oil and the precious metals.

Yesterday Fed Chairman Ben Bernanke gave his semi-annual Monetary Policy Report (Humphrey-Hawkins testimony) before the Senate Committee on Banking, Housing, and Urban Affairs. The same testimony will be delivered today before the House Committee on Financial Services. Mr. Bernanke provided yet another optimistic assessment of the economy, noting that we're now in our seventh quarter of growth. He went so far as to say that there is "increased evidence" that the recovery is becoming self-sustaining. Apparently we're not there yet though, because he also reiterated the Fed mantra of an "exceptionally low target rate for an extended period," citing ongoing concerns about softness in labor and housing. That doesn't sound very "self-sustaining" at all.

Bernanke also noted that in recent quarters "investors appeared to become more concerned about the possibility of deflation, or falling prices." I'm not sure if the chairman has been reading the papers lately, but the opposite -- inflation -- seems to be weighing much more heavily on investors minds. Yet Bernanke continues to dismiss the recent rise in commodity and energy prices, saying, "the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation." I guess only time will tell.

The bottom line is, that despite a generally positive outlook for the economy, it would seem that Fed accommodations aren't going to be removed any time soon. Even if employment and the housing market were to rebound significantly in the next 4-months into the slated end to QE2, can the Fed really pull their accommodations? With the Fed now buying 70% of Treasury's debt issuance, one has to wonder who will step in to fill the void when the Fed finally does implement their so-called "exit strategy." PIMCO's Bill Gross poses the question plain and simple in his most recent Investment Outlook: Who will buy Treasuries when the Fed doesn’t?

Certainly nobody is going to completely fill the massive void in the debt market left by a retreating Fed at the current yields. Yields will have to rise once the Fed's faux demand is gone and yields start to once again accurately reflect risk and that will threaten the recovery. So you see the dilemma. Our own Jonathan Kosares discussed this very topic in the lead article of our December Newsletter. People began to speculate about QE3 shortly after QE2 was announced and such market chatter is ongoing and even intensifying. In a recent Barron's interview, MacroMavens' Stephanie Pomboy says she doesn't believe the recovery is sustainable at all. Her recommendation? Buy Treasuries...clearly she thinks the Fed is going to remain a buyer and can be front-run...oh, and buy gold.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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