There seems to be no short supply on political and Wall Street theatre these days. Americans continue to watch and wait for an outcome on the debt ceiling, while Wall Street continues to watch and wait for another sugar (NYSE:SGG) rush via the Federal Reserve. Although there seems to be little resolution on the debt ceiling, some clarity was seen from the Federal Reserve.
On Wednesday, Fed Chairman Ben Bernanke delivered his semi-annual monetary policy report to the House of Representatives. The first big reaction from financial markets came when Bernanke said, ” The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.” The U.S. Dollar (NYSE:UUP) declined and sent commodities (NYSE:RJI) to a 4-week high. Gold (NYSE:GLD) and silver (NYSE:SLV) screamed higher as investors ran from the dollar. COMEX (NASDAQ:CME) August gold futures settled at a new closing high of $1585.50, while silver miners (NYSE:SIL) such as First Majestic (NYSE:AG) and Endeavour Silver (AMEX:EXK) popped 7.77% and 5%, respectively.
The next interesting part from Ben Bernanke’s presentation felt like a metal cage death match exclusively held for gold and silver bugs. Dr. Ron Paul, who is no stranger to pressing the Fed Chairman on economic issues, asked Bernanke point blank about gold. Dr. Ron Paul asks, ” The price of gold today is $1580, the dollar during these last 3 years was devalued almost 50%, when you wake up in the morning do you care about the price of gold?” Bernanke says that he “pays attention to gold, but gold represents many things.” He goes on to explain that gold is used as a protection against tail risk, very bad outcomes. Dr. Paul then asks the Fed Chairman if gold is money? After pausing for a moment, Bernanke responds with a “no, it’s an asset”. Dr. Paul fails to understand Bernanke’s reasoning on this, because gold was used as money for 6,000 years, until the gold standard was abolished. This leads Dr. Paul to ask one last question, “Why do central banks hold gold?” Bernanke responded with, “It’s a form of reserves.” Dr. Paul wonders why central banks don’t hold diamonds instead of gold as reserves, but Bernanke can only explain that it is “tradition” to hold gold as reserves. I found this comment interesting, because tradition shows gold being used as money. Tradition over the past decade also shows the true winner of monetary debate to be precious metals. Gold has risen from $250/oz to nearly $1600/oz, while silver has increased from $4/oz to as high as $50/oz.
Investors seeking protection, not from remote tail risk scenarios, but from the ongoing devaluation of fiat currencies, should consider precious metals (NYSE:DBP) and PM miners such as Market Vector Jr Gold Miners ETF (NYSE:GDXJ), Barrick Gold (NYSE:ABX) or Yamana Gold (NYSE:AUY).
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Disclosure: Long AGQ.