It’s not often I agree with Ben Bernanke, but this time, in regards to gold, I do. Please consider Bernanke Says Gold, Commodities Conflict on Inflation.

U.S. Federal Reserve Chairman Ben S. Bernanke said gold prices, which surged to a record yesterday, are sending a different signal on inflation than raw materials.

“Other commodity prices have fallen recently quite severely, including oil prices and food prices,” Bernanke said today in response to a question during testimony to a House Budget Committee hearing. “So gold is out there doing something different from the rest of the commodity group.”

Gold futures for delivery in August fell $15.70, or 1.3 percent, to $1,229.90 an ounce on the Comex in New York today. Yesterday, the metal reached $1,254.50, an all-time high. The price climbed for nine straight years and is up 12 percent in 2010.

“Bernanke is dispelling the argument that people are out there buying gold because of the threat of inflation,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Deflation is now more of a threat.”

“There is a great deal of uncertainty and anxiety in the financial markets right now,” Bernanke said. “Some people believe that holding gold will be a hedge against the fact that they view many other investments being risky and hard to predict at this point.”

In testimony to the House committee, Bernanke said that the U.S. economic recovery, while being sustained by private demand, isn’t as strong as he prefers and faces risks from Europe’s debt crisis that may require further Fed action.

Private Demand Mirage

In regards to private demand, Bernanke must be looking at Paul Krugman’s Magic Keynesian Mirror.

Please click on the previous link for details as to how the magic mirror works.

Private demand only appears to have has risen because of countless stimulus programs. For example, housing is poised to crash (again), now that the second round of $8,000 tax credits have expired.

New Mortgage Applications at 13 Year Low

Inquiring minds are reading Overall mortgage application volume falls 12.2 percent.

The number of customers applying for a mortgage to purchase a property fell to the lowest level in 13 years last week, a sign the housing market is struggling without government incentives.

Purchase volume declined 5.7 percent and is at its lowest point since February 1997, the Mortgage Bankers Association said Wednesday.

“Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April,” said Michael Fratantoni, MBA’s vice president of research and economics.

Little Genuine Demand

There is very little genuine demand, there is only the magic mirror that makes it appear like there is.

BMO’s “Go to Cash” Call

Credit conditions are weakening across the board and the Bank of Montreal(BMO) says “Go to Cash – In Plain English”.

That is quite a report.

“Gold is Different” Says Bernanke

Proving that even monetarist clowns can sometimes say something that makes sense, I have to agree with Bernanke on this idea: “Gold is out there doing something different from the rest of the commodity group.”

Indeed it is. The reason has nothing to do with inflation, but everything do with default risk.

Our little bout of an inflation scare from March 2009 through April 2010 has possibly come to a close. 2007 and 2008 were deflation years in my model and we are back in deflation now given that credit marked to market is clearly plunging once again.

Gold is Money

Gold is acting differently because gold is money, and equally important, money that was not borrowed into existence and is no one else’s liability.

How do we know gold is money? Because it acts like it! Please see Misconceptions about Gold for a complete discussion.

Gold will not default. Good luck with everything else.

Of course gold is not immune to pullbacks, perhaps even sharp ones as sentiment varies and also because of gold derivatives and the deleveraging of paper gold. However, that does not change the real story, and oddly enough, I think Bernanke senses it.

Mike “Mish” Shedlock
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