Bernanke Puzzled by Gold Rally

By: Frank McGuire

Federal Reserve Chairman Ben Bernanke says he is puzzled by the skyrocketing price of gold.

“I don’t fully understand movements in the gold price,” Bernanke admitted Wednesday during testimony to a House Budget Committee hearing.

“Other commodity prices have fallen recently quite severely, including oil prices and food prices,” Bernanke said. “So gold is out there doing something different from the rest of the commodity group.”

Gold prices hit an all-time high on Tuesday above $1,250 an ounce on fears that Europe's debt contagion could lead to a double-dip recession.

Meanwhile, other commodity prices are falling. Copper prices have fallen 17 percent this year.

Gold’s 30 percent rally from last year’s levels, in addition to gains from previous years, might be interpreted as warning signs that inflation pressures are mounting, the Wall Street Journal reports. Gold is seen by many investors as a hedge against inflation risk and a haven.

Gold's response to inflation signs is different when compared with other assets and commodities, Bernanke said. "The signal that gold is sending is in some ways very different from what other asset prices are sending," said Bernanke.

Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently, the Journal reported. Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low.

This evidence suggests that "markets expect about 2 percent inflation over the next 10 years," he said.

“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.”

Gold has outperformed stocks, bonds and other commodities this year.

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

“Deflation is now more of a threat,” he said.

“When there’s nowhere else to turn, people turn to gold,” Zeman said.

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