On Central Banks and Gold's New High

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...If Dr. Bernanke makes the magic work...We will look ahead to a bright future. The U.S. Dollar will recover. The U.S. economy will pick up. New jobs will be created and all will be right with the world. Of course should this come to pass the price of Gold in U.S. Dollars will drop. It will sink like a rock in water. Maybe even faster than the last time, until the next crisis is created by the easy credit.

...As for Gold, well, they (Central Banks) can influence the price of that commodity as we have seen over the years. When the worlds' Central Banks were dumping their Gold Reserves on the Markets we saw the prices of the glittering yellow tumble. These Central Banks were placing their faith in a Stable U.S. Dollar and ever expanding U.S. economy via purchase of US Dollar Denominated Instruments, Treasuries and even some GSEs, Government Sponsored Enterprises.

This exchange of Tangible wealth for Promissory wealth worked well as long as the instruments stayed ahead of or kept pace with inflation. In a hodge-podge Central Bank environment that was pre-Euro Europe the Buck was King as the standard of stability. This we can thank Paul Volcker for, as he showed that the US Federal Reserves was as serious about controlling Inflation as the Germans are, regardless of the consequences.

...We are now on the verge of significant economic turmoil in the U.S. brought about by the Sub-Prime fiasco. As I have stated before, sub-prime loans are not bad nor the cause of the problem. The problems were caused by excessive leverage due to low interest rates and easy access to cash. When that dried up, the borrowers, like Midas, went without food or drink. So what does Dr. Bernanke plan to do? Why, he plans on emulating the Maestro, and getting the music going again.

If he makes the magic work, he will be applauded by all as a fitting successor. All around will be the glittering statues and well-laid tables of inedible splendor. We will look ahead to a bright future. The U.S. Dollar will recover. The U.S. economy will pick up. New jobs will be created and all will be right with the world. Of course should this come to pass the price of Gold in U.S. Dollars will drop. It will sink like a rock in water. Maybe even faster than the last time, until the next crisis is created by the easy credit.

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