Gold at $700

Memo to: Website readers
From: Polyconomics Staff
Re: Bernanke Watches Gold, But Does He Understand What It Is Signaling?

This afternoon, the price of gold hit $700/oz. for the first time in nearly 30 years. It is a startling indicator of how off the rails Federal Reserve Board policy is with respect to the dollar's value. Current Chairman Ben Bernanke has recently confessed that the gold price shows up on his screen and that "there is information in the gold price as there is in other commodity prices." But such bromides only raise more questions than they answer when one considers the inflationary tear gold and commodities have been on since his predecessor, Alan Greenspan, began raising rates in 2004. It's a monetary phenomenon we've been pressing since day one. Still, Bernanke persists in hinting at more rate hikes even though the dollar continues to weaken despite already 375 basis points worth of fed rate hikes.

Most people couldn't have imagined gold sky-rocketing a year ago. Conventional wisdom understood the Fed's policy response -- rate hikes -- was supposed to prevent inflation; and was supposed to prevent outlandish increases in commodity prices that would eventually end up spilling over into general prices. This, after all, is what one sees in the beginning of inflation. Only a few understood that the Fed's interest-rate targeting mechanism was the wrong tool for the job. Yet, given the Fed's unwavering commitment to interest-rate targeting as opposed to a commodities basket or even a gold target, like the good old days, it seemed perfectly reasonable to us back then that the dollar would lose ground against gold and other commodities. Indeed, that's what we warned clients as early as 2004 and what has occurred since.

So here we are today with gold around $700/oz, oil around $70/barrel, and gas over $3 a gallon at the pump. And price increases are beginning to spread. Do average Americans really trust official CPI (or PCE) statistics today that purport no inflation? Not at all. In fact, they're getting out of dollars and moving into hard assets at an alarming rate.

The chart below is a graphic depiction of the current upward trend that the Fed has been unable to reverse. How high can gold go? Money that floats is hard to figure. But at this level, inflation is eating away at every dollar in the universe.

Legendary supply-sider Jude Wanniski, founder and chairman of Polyconomics, Inc., is a world-renowned political economist whose 1978 book The Way the World Works was named one of the 100 most influential books of the 20th Century by the editors of the National Review. He was an economic advisor to Ronald Reagan from 1978 to 1981. Wanniski runs Wanniski.com a macroeconomic investment newsletter.