-- Posted 23 November, 2010 | | Discuss This Article - Comments:

Any careful observer of the Federal Reserve should be slowly coming to the conclusion that Bernanke is off his game plan.  In the past few weeks and months, Bernanke has repeated before Congress that his dual mandate is to provide for slow and gradual recovery, but low inflation and full employment.  Recently though, Bernanke is on a new tangent, a semi-mercantilist endeavor to lower the value of the US dollar against emerging economies.

As if the failure of the stimulus package and loose monetary policy weren't already clear from the sheer number of jobless and the general stagnation in the US economy, it is now clearer than ever that the Fed is fighting a moving target.  Spending didn't get the economy moving, negative real interest rates are engaging only simple speculation in financial markets, and now Bernanke is searching for a new outlet: international currencies.

In a monthly briefing to the House Financial Services Subcommittee, Bernanke alleged that emerging marketing currencies should absolutely rise in value against the US dollar, if only because their economies are growing several times faster than the American economy.  His goal, then, was made clear: if the markets do not allow for some appreciation in the value of emerging market currencies, the Fed, through quantitative easing, will make the dollar weaker, and by contrast, emerging market currencies stronger.

Get Ready, Silver

The new self-administered Federal Reserve mandate has its benefit for silver investors, primarily that emerging markets, in contrast to others, are some of the largest silver buyers. 

This provides plenty of newly discovered momentum to the markets, as each drop in the value of the dollar not only buoys silver as a monetary metal, but also because foreign purchasers can buy more of it.  India, for example, has an unquenchable thirst for both silver and gold, and despite growing differences between the US and Indian economies, the Rupee has yet to make a big move higher.  An appreciating Rupee and falling Dollar would allow for an even steeper incline in 2011 on stronger demand from India in its heaviest buying season.

Underwriting Metals

Americans are already swapping their dollars for monetary metals, and therefore, any foreign increase in demand, especially for what is considered to be a “dollar short,” is sure to send shockwaves through the markets.  Bernanke is now wielding a double edge sword.

While Bernanke was the first to admit he was underwriting the stock markets, it is even more obvious that he's now, directly or indirectly, underwriting metals.  It is important to note that while silver has appreciated rapidly in response to monetary policy measures, the full brunt of quantitative easing is not yet felt.  Not a single dollar has yet to emerge from bank reserves in the conversion from monetary potential to full-force kinetic energy. 

When the dollars do start flowing out of bank reserves and multiplying through the fractional reserve banking system, expect nothing less than rapid depreciation of the dollar, rising silver prices, and an even greater global appetite for monetary metals.  The fun has just begun.

Dr. Jeffrey Lewis

www.silver-coin-investor.com