Fellow Resource Prospector,

*****I don’t envy Ben Bernanke. It seems like no matter what decision he makes, he will face enormous scrutiny from powerful and powerfully opinionated interests.

For instance, if he continues down the road of printing more money, (aka “Quantitative Easing”) he’ll hear about it from fiscal conservatives, libertarians, and a whole group of people who are just plain angry about the idea of printing more dollars, even though they might not know exactly why they’re angry.

If you work hard to save your money, invest it wisely and make responsible fiscal decisions like me, I think you should be angry. Inflationary policy necessarily hurts those of us who save our money instead of spend it. It rewards people who spend recklessly - it even rewards people who go way over their heads in debt to support their profligate lifestyles.

On the flip side, if Ben Bernanke chooses NOT to continue his inflationary policy, the economy will surely take a huge downturn - maybe even bringing the Dow Jones Industrial Average below 7,000. And you better believe if he pursues a more “austere” fiscal policy, he’d have a variety of politicians, business interests, other central bankers and hobbyist Keynesians calling for his termination and possibly his head.

But inflation-as-policy isn’t just a PhD thesis brought to you by Ben Bernanke - it’s a United States central banking thesis - and even a world-wide central banking thesis. In short, the idea is that central banks CAN and SHOULD boost consumption demand by making money easy to access.

John Maynard Keynes, the progenitor of this theory flippantly suggested burying jars of cash in abandoned coal mines in order to get people to work for the money so that it wouldn’t necessarily be “free.”

Central banks more typically make money easy to access through a variety of tools at their disposal, the easiest and most obvious being to lower interest rates. Lower interest rates lower the bar for everyone to borrow money, which they inevitably spend.

On the other side of the inflation spectrum, you have Ben Bernanke sending cash directly to the Treasury. That’s the ‘Quantitative Easing” or QE you’ve been hearing about. Where does it come from?

It comes from nowhere. It’s created by Federal Reserve computers, and sent to U.S. Treasury computers.

In any event, whether the Fed buries money in jars, or it lowers interest rates, or simply prints it, the effect is inflationary. And we know the results of inflation: higher prices for just about everything.

*****In that vein - you should probably be aware of QE’s double-edged sword for short-term commodity prices.

As you know, I’m predicting higher prices for most commodities over the long term. But if Bernanke announces QE that’s less than what the street is expecting, or announces no plans for overt QE at all, I’m certain that we’ll see some substantial corrections in commodity prices for the short term.

That can be good news or bad news. If Bernanke really is abandoning QE and his other inflationary policies, and officially pursuing austerity measures, well - then we might be looking at a long tumble for commodity prices as the dollar strengthens and deflation sets in.

I don’t think it’s likely - but even if Bernanke’s announcement is slightly disappointing, I’d expect gold and silver to get 10-20% haircuts in rather short order as the trading contingent abandons their precious metal positions.

If you’re a trader and you get wiped out by this news, that’s bad news for you.

But if you’re like me, and you’re looking for another chance to buy these commodities at a discount to today’s prices, then it’s great news.

*****Here’s what to do: wait until November 3 before making any huge purchases of gold or silver. If he announces huge QE2 numbers, gold and silver will continue rallying, and you should buy the trend.

If QE2 disappoints, you can wait for gold and silver to hit a bottom and then buy at a discount.

Yes, I fully expect that gold and silver will continue to rally, but if QE2 disappoints, your money would be better off waiting for the correction.

Good investing,

Kevin McElroy
Editor
Resource Prospector