Bernanke Holds a Match to the U.S. Dollar
I hope you find my discussion of Bernanke's latest dollar-bashing appearence of interest, and I request that you please circulate this one as you are able among your friends, family, and acquaintances. Sometimes a beautiful Friday evening after a streak of inclement whether is hardly a strategic moment to publish a discussion like this, and indeed I hope you all are out enjoying yourselves as I just was. When you next get back to your computers, however, thank you in advance for helping this article to not get lost in the shuffle of a late-Friday lull in Springtime.
The real "Bernanke put"
Even as Bernanke spoke, the U.S. dollar index crashed unceremoniously through near-term resistance, setting the stage for an historic retest of the index's all-time low of 71.32 in spring 2008. When that last leg of technical support for the dollar buckles, I believe the acute currency crisis that I warned fellow Fools about more than two years ago will enter a new and highly disruptive chapter. We can only hope that this story may still have a happy ending.
As it happens, according to economists at Deutsche Bank, the dollar has already recorded a fresh new low for the fiat-dollar era, on an inflation-adjusted basis, as measured against a trade-weighted basket of currencies.
Now, with a fresh Bernanke-boost in place, it seems to me that only a miraculous, immediate, and fundamentally unwarranted rally in the U.S. dollar -- to somehow avoid that fearful encounter with its all-time low from 2008 -- could snap the near-term momentum in gold and force a retreat in silver from psychological resistance at $50. While traders fight in the COMEX futures pits to determine the near-term dynamics of exchange rates between the three currencies -- gold, silver, and the dollar -- ultimately I maintain my long-term view that $1,500 gold is just the beginning.
Personally, I hope I'm 100% wrong about all of this. I would rather lose every last penny that I have invested in my top gold pick, Gammon Gold (NYSE: GRS ) , or the immensely profitable Silver Wheaton (NYSE: SLW ) , than be forced to observe the disorderly dethroning of the world's primary reserve currency. As I have stated before, though I have staked my investment capital in accordance with my macroeconomic outlook, gold's rise is for me a somber affair.
David Woo, a currency strategist for Bank of America Merrill Lynch, summarized one such scenario in terms that ought to demand your Foolish attention:
"In our risk scenario, little progress on the fiscal front raises the probability of a fiscal crisis and the odds that the Fed becomes the buyer of the last resort. This would accelerate the process of the USD's demise as the global reserve currency and cause it to decline in a disorderly manner."
If U.S. Treasuries were a viable safe haven asset at present, then the world's largest bond fund would own some. PIMCO has shed all such exposure, and has even initiated a short position. Nobody seems capable of answering PIMCO head Bill Gross' non-rhetorical question: Who will buy Treasuries when the Fed doesn't? Someone has to bankroll the dauntingly massive gap between federal expenditures and revenue still emerging from Washington, and the bond market has relied upon QEII to fund 70% of U.S. debt issuance since its inception.