Bernanke’s Psychological Warfare On Gold and Silver

If you want to return the U.S. economy to the glory days again, one potential way to do it is to have people perceive “all is well” by propping up the one area that most view as a sign of a strong economy; the stock market.

When people look at their 401k statements at the end of the month and see a higher figure than the prior month, they get a feeling of comfort.

What a better way to get investors out of gold and silver than to offer them an alternative that is moving higher at a faster pace? This would be even better for the stock market if at the same time, there was a dip in the prices of gold and silver, which we saw Tuesday with gold down 2.45% and silver down 2.84% and the DOW up just over 20.

Indeed, with the DOW now marching towards the 12,000 mark again, the media is pulling out all stops to paint the picture of a rebounding economy. Just take a look at the following most recent financial and economic headlines from head cheerleader CNBC;

S&P Up More Than 1% on First Day of the Year – A Good Sign for 2011?

“Today’s rally may also bode well for a gain in 2011 – if recent trends hold.”

US Economy Looks Better Than Expected: Gartman

“We are seeing an economy coming out of the serious recession that we went through,” he said. “We’re going to see 3 to 4 percent GDP growth and that’s not such a bad thing.”

Austerity Approach by Republicans in the House Will Not be Confined to Health Care

“I believe that the austerity approach by Republicans in the House will not be confined to healthcare. I believe that they will also go after the EPA and other agencies perceived as antibusiness.”

US to Detail Pentagon Savings, Cuts

“U.S. Defense Secretary Robert Gates is expected to announce as early as Thursday about $100 billion in savings for the Pentagon and cuts to some weapons programs, sources said on Monday.”

Fed Speculations

The government and the Fed can do things to possibly create positive short term data that makes one think all is well. If a billionaire was interested in a company and wanted to acquire a large position in the stock, eventually the word would get out and the stock price would move higher. Warren Buffet has had this effect on companies over the years.

The Fed, even though we would never find out what exactly they did because they can’t be audited, could effectively move markets in the direction they want. They can pump money into banks or bank holding companies like Goldman Sachs or J.P. Morgan. Remember, they were involved in bailing out AIG and Bear Stearns not too long ago.

What these banks or holding companies do with the money is unknown, but it wouldn’t surprise me that there might be some strings attached in doing what the Fed wants them to do (behind close doors of course).

For example, what would be the effect of large sums of money buying the S&P? Just like the billionaire buying the stock in the company they liked, the price would move higher. Of course this is pure speculation, but not beyond the realm of possibility.

Gold and Silver; Enemy of the Fed

In a sense, Bernanke is also fighting the large amount of money going into gold and silver. These precious metals are the enemy of the Fed because their rising price reveals the weakness of printing money and additional quantitative easing with the result of such policies being inflation and a weaker dollar. Wouldn’t things be better for the Fed if gold and silver didn’t exist or at least were knocked down a peg or two, especially if they had the stock market moving higher at the same time?

As the price of gold and silver moves higher and higher, and as the dollar gets weaker, panic could set in, shifting the psychology of the masses from one of thinking things are getting back to normal again, to one of fear. This is what Bernanke and the Fed want to avoid.

Anyone who can do basic math however, knows the unsustainable path our economy and the dollar are on and thus understand our date with destiny.

Our Economic Destiny; Unsustainable

If the government were your average U.S. citizen in debt with maxed out credit cards, does giving this citizen more credit solve their underlying problem of debt? Giving the government an increase of their credit line may provide for some short term positive economic activity , but sooner or later, the card is maxed out again and the debt ceiling needs to be raised. But the average debtor can’t keep getting more credit, and our congress just votes for more printing (debt) by majority, never to be denied. And we keep voting for these clowns who keep putting us deeper and deeper in debt.

Republicans balk at raising the debt ceiling while democrats claim that not doing so would be “catastrophic.” Don’t worry….they will vote to raise the debt level above the $14.3 trillion set last January. It’s what congress does best as their are no constraints on them. That’s the real problem; constraints.

Bernanke Knows the Madness of Crowds

Bernanke knows that if the consumer would just do what they do best, spend, this could stimulate the economy and get businesses spending and an economic recovery could possibly occur.

So while the media, Fed and politicians “talk the talk” of a stronger economy or austerity measures currently being considered, the underlying fragility of the data hasn’t changed and in fact, is getting worse.

• Double dip in housing is almost here
• Commercial real estate loan delinquencies are rising with more problems ahead
• Government spending is still what’s propping up GDP
• Banks have more sub-investment grade derivatives than at the height of the financial crisis
• Manufacturing recovery dies in terms of unemployment
• The American Recovery and Reinvestment Act (more stimulus) is only a temporary solution
• U.S. States continue to face large budget gaps
• Despite seasonal job growth, future employment looks dim
• Pension plans are underfunded
• Medicare is gaining 7,000 new 65 year old baby boomers a day

So what’s going on here? Is the stock market moving higher indicative of the overall economy getting better? Do we just forget about these other issues and pretend “all is well?”

Despite the words of Dennis Gartman and others claiming the economy will grow, this growth can’t be expected to last if it comes mostly from government spending. At some point the music stops and the only two chairs available are made of gold and silver.

Study the economic data for yourself. Buy these dips in gold and silver through dollar cost averaging into a position in the physical metal. The government spending, which knows no end, will take care of the future price increases. Until congress is constrained, gold and silver need to be a part of everyone’s portfolio as insurance. Don’t be fooled by the stock market moving higher or the psychological games being played by Bernanke and the Fed.

It’s just a grand illusion…

You’re fooling yourself if you don’t believe it
You’re killing yourself if you don’t believe it
Get up, get back on your feet
You’re the one they can’t beat and you know it
Come on, let’s see what you’ve got
Just take your best shot and don’t blow it.

Grand Illusion by Styx (1977)