Yesterday the Subcommittee on Domestic Monetary Policy and Technology held another meeting, titled Impact of Monetary Policy on the Economy: A Regional Fed Perspective on Inflation, Unemployment, and QE3. Its only witness was Thomas Hoenig, the retiring president of the Federal Reserve Bank of Kansas City.

Some of our readers may recall a favorable article on Hoenig by our own Doug Hornig. As Doug noted in the article, Hoenig is the closest thing to a good guy at the Fed. Hoenig was a dissident on QE2 and now opposes QE3 as well. Furthermore, he has advocated moving away from near-zero interest rates. On top of this, he has warned of the disastrous effects of prolonged low rates, which lead to bubbles and misallocations of capital.

In this hearing, he testified that conditions to create a bubble are ripe in farmland and the bond market. Many of his statements are almost consistent with Austrian economics, a strong influence here at Casey Research. Hoenig notes that he has read the nearly thousand-page Austrian economics masterpiece Human Action, by Ludwig von Mises (check out his comment on Austrian economics after 1:12:00). Compared to his colleagues, Hoenig is the black sheep at the Fed.

So, what can we learn from this hearing? Not much, from the actual questions and testimony. Once again, Representative Al Green (D-TX) gave his two cents on the necessity and “wisdom” of the bank bailouts. Why Green continues to discuss the bailouts almost every meeting is beyond me: He seems to represent the banking and financial sector more than the state of Texas. Perhaps, one day Green will ask a question relevant to current monetary policy.

Other members of the committee couldn’t help but focus on the debt ceiling. Just like in Bernanke’s recent testimony, they wasted important time discussing fiscal issues rather than monetary policy. Beyond that, Ron Paul had a few good lines, in particular one poking fun at Bernanke’s recent comments at the last hearing. Paul notes at 1:16:55, “Last week, I learned that gold is not money.”

Unfortunately, there wasn’t much substantive information at the hearing. The final highlight was a gentleman sitting to the left of Hoenig waking from his nap at 1:25:00. Hey, these meetings can get pretty boring. I understand.

So was it all a waste of time? Not exactly. Hoenig’s testimony revealed how radical the Federal Reserve has become. Ultimately, Hoenig’s policy prescriptions were not unusual. He supported the initial slashing of rates to zero. He agreed with Representative Green that things could have been worse without those actions, including the bailouts. Furthermore, earlier in the year, Hoenig suggested raising rates to one percent by this fall and then waiting to see how the market reacts.

This is hardly radical. Essentially, Hoenig wants to follow the footsteps of European Central Bank. They’ve raised rates by nearly the prescribed amount and may have another hike before the year’s end. Then the ECB will likely wait to assess the effect on the market. The European policy is something to keep in mind. Hoenig isn’t some black sheep in the world; his policy recommendations would be welcomed at the ECB. If Hoenig is getting so much resistance in the U.S. for well-accepted views elsewhere on interest rates, then that says something about the Fed. Perhaps Hoenig is not the black sheep – the rest of them are. Other major economies are increasing their rates; the Fed is the one lagging behind.

In today’s issue, Jeff Clark follows up his gold stock commentary with a similar one for the precious metal itself. After that, I’ll return with some links for your reading pleasure, and some program notes for this missive.

Gold’s Noise Is Getting Louder

By Jeff Clark

I outlined last week the increasingly bullish consensus among analysts about gold stocks. The same pattern exists with gold itself; growing numbers of analysts have either joined the movement or have upped their bullish outlook.

The following comments and developments have all been reported just this month. It presents quite a convincing case when one strings them together like this. Keep in mind that this is what these analysts and managers are telling their clients.

SICA Wealth Management’s Jeffrey Sica: “Right now, I think gold looks better than ever.” He sees a “painfully high probability” of troubling events occurring in the months ahead. “There has been a general loss of confidence in the ability of central banks and governments to manage the economy. That will continue to give gold and other precious metals a boost.”

Empire Economics chief economist Clifford Bennett expects gold to come close to $2,000 an ounce this year and $2,200 an ounce within 18 months. “There is risk in the second half of the year of a bit of a ‘panic spike,’ if you like, as everyone thinks there isn’t enough to go around and starts to hoard. That’s when you’ll really see gold take off towards $2,000 an ounce.”

Franco-Nevada Chairman Pierre Lassonde said the coming mania in gold will make the 1970s run look like child’s play. “In 1980, the only players, or the dominant players, were the Americans. Today the dominant players are China and India; 58% of all the gold sold this year will be sold in these two countries. When we reach that mania phase… watch out, because it will truly make your head spin.”

Antaike analyst Shi Heqing had this to say about Chinese investors: “Record high prices won’t scare away investors… they are likely to chase the rally and continue to buy gold because paper money feels increasingly worthless and they are worried about inflation.” Shi expects China’s gold demand to rise about 20%, due in no small part to the country’s 6.4% inflation rate.

Reuters: “The case for gold in the longer term is still very strong,” said a Singapore-based trader. “Gold may appeal to new classes of investors who previously avoided the market in favor of more mainstream investments like bank deposits, bonds, and equities. Potentially there’s a whole new market for small-sized gold bars if these investors lose faith in paper.”

Newedge USA predicted gold will hit $1,800 and silver $70 by year-end due to investors seeking a haven asset and physical demand from Asia. “Gold is an excellent hedge in troubled times” said Mike Frawley. “Demand will be very strong long-term from Asia, and the economic trend in the West is improving.”

FX Concepts founder John Taylor: “Gold will climb to $1,900 by October.”

SMC Global: “Evidence of sluggish U.S. growth has shaken investor confidence. Concerns about rising inflation here have also boosted appetite for gold ETFs. Demand is high from small players.”

Minerals and Metals Trading Corp’s Ved Kumar Prakash reported “skyrocketing” demand for gold in India. He predicted that given the company’s brisk sales, gold imports would jump by more than 40% this fiscal year.

The Swiss Parliament is expected later this year to discuss the creation of a gold franc. “I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. “Today’s monetary system is all backed by debt – all backed by nothing – and I want people to realize this.”

An “Iranian gold rush” is under way, according to an article by Reuters. “Usually as the price of an item increases, demand will decrease – but in the case of gold, it seems that higher prices are creating more demand,” said an unnamed Tehran gold retailer. “The reasons that people are drawn to these safe assets – gold coins and hard currency – are firstly a limited choice of investment opportunities, and secondly a fear from the weakness of the national currency,” said an economist who asked not to be named.

The Utah Legal Tender Act was signed into law by Governor Herbert last month. “Good monetary policy is an important part of a healthy and prosperous economy,” said Senator Mike Lee. He and other Republicans also introduced legislation to eliminate federal capital gains taxes on gold and silver coins. “Since the Federal Reserve Act of 1913, the dollar has lost approximately 98% of its value. This bill is an important step towards a stable and sound currency whose value is protected from the Fed’s printing press.”

CIBC World Markets’ Peter Buchanan remains bullish even if the debt ceiling talks resolve. “Even in the likely event Congress agrees to a debt ceiling rise, recent uncertainties are likely to reinforce central banks’ ongoing efforts to diversify from the dollar into gold and other assets.”

Citigroup Global Markets reported that silver may more than double to $100 an ounce if the current bull market follows similar patterns seen between 1971 and 1980. “If the final rally in the last bull market repeated, then we can expect $100 over the long term… While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.”

Gold Forecaster analyst Julian Phillips: “This is not typical of a ‘bull’ market that will eventually fall back from whence it came. We believe gold is not in a ‘bull’ market, because it is changing its shape and nature permanently. Our reasoning is not academic posturing, but a reflection of the realities that have taken place over time and those that confront us now. Because it is perceived to be an alternative wealth-preserving asset, a counter to a failing monetary system, it is not a simple commodity moving up and down with the flows and ebbs of economic cycles; it is a valid measure of monetary values.”

American Precious Metals Advisors Managing Director Jeffrey Nichols: “A recent survey of 80 central bank reserve managers predicted that the most significant change in their official reserve holdings in the next 10 years will be their intentional build up in gold reserves. They also predicted that gold will be their best performing asset class over the next year, and sovereign debt defaults will be their principal risk.”

Gloom Boom and Doom editor Marc Faber: “I just calculated that if we take an average gold price of say around $350 in the 1980s and compare that to the average monetary base and the average U.S. government debt in the 1980s…and then if I compare this to the price of gold to today’s government debts and monetary base, gold hasn’t gone up at all. It’s actually gone against these monetary aggregates, and against debt it’s actually gone down. So I could make the case that gold is today probably very inexpensive.”

GoldMoney founder James Turk: “In reality there are very few participants currently in the gold market… when I look at the price action, it suggests to me that a lot of this big money on the sidelines wants to be in. Therefore we are seeing some aggressive bidding on any pullbacks.”

Reuters Money reports that eBay’s “gold and silver outpost” has seen gold bullion sales jump more than 60% from 2007 through 2010. More significantly, “almost half of the silver and gold buyers in the first quarter of 2011 never purchased these items on eBay before.”

Sprott Asset Management chief investment strategist John Embry: “I think it will be really exciting when silver clears $50, because then it will be in absolutely new ground. There is, without question, major physical shortages of physical silver, and demand is robust. Once silver gets rolling, it’s going to levels people cannot imagine.”

It’s hard to go one day without seeing comments like these. The chorus is growing, and as these bullish views spread further and further into the mainstream, the number of investors attracted to precious metals will swell and continue to drive prices higher.

Is this growing consensus the sign of a top? As I said about gold stocks, taking the contrarian view in response to this information would be the wrong move. Fiscal and monetary issues are getting worse, not better, and I think we’re simply seeing more investors recognize the inevitable. We’ll worry about exiting this sector when real interest rates are positive and the dollar is once again a revered currency. Until then, it’s hard to imagine a scenario that isn’t bullish for gold. Any pullback should thus be viewed as a sale price.

Is the impetus for a mania building? I don’t know if we’re on the doorstep of that phase or not, but the fundamental reasons to hold gold are as strong as they’ve ever been. Indeed, it’s getting more critical to have meaningful exposure to precious metals. Keep in mind that when the debt ceiling talks reach a resolution – whatever it may be – the fundamental problems of excessive debt and further deficits will still be unresolved.

Will gold correct if agreements are reached on the debt talks? Probably, but I think the more appropriate question to ask is this: If these analysts are correct, do I own enough ounces?

[BIG GOLD makes it easy for investors to sift through the myriad ways to invest in gold - including mining companies, ETFs, and more - to find those with the highest profit potential. A subscription is risk-free for ninety days... and there's no better time to start one than now.]

Additional Links and Reads

Why Government Loves Fiat Money (YouTube)

Here’s a pretty good, short animated video on the value of gold versus fiat money. The video also points out that it’s difficult to have major prolonged wars without fiat money. In a way, it’s a necessary ingredient as nations engaged in wasteful wars all go bankrupt without the printing press to keep them afloat longer. As I mentioned in the links section yesterday, this is a fact that neocons trumpeting the gold standard seem to accidentally overlook.

Rogers: U.S. Has Already Lost AAA Rating (Real Clear Markets)

Jim Rogers makes some good points here on the default debate. It’s all a charade. In the past few weeks, I haven’t commented much on the topic for that very reason. The real problem with the U.S.’s credit rating should be its outstanding debt, not a short-term political decision.

The current rating agency threats remind me of Japan’s downgrades prior to the earthquake. The country was downgraded due to its political climate rather than the enormous debt burden. The ratings agencies should get back to judging countries on the very clear numbers rather than subjective political opinions. The debt of the United States is enormous and out of control – that fact will not change anytime soon regardless of what may happen in the weeks ahead.

Study: Racial Wealth Gap Biggest Ever (Politico)

The typical black household had $5,677 in wealth – defined as assets minus debts – in 2009, the typical Hispanic household had $6,325 in wealth, and the typical white household had $113,149, Pew found.

I don’t spend a lot of time studying racial statistics, but I found these data interesting. With Obama in the White House, the racial wealth gap is bigger than ever (since records began in 1984). I wonder what the wisdom of the left has to say about this. This means that the gap was smaller even during the Reagan years, which are often demeaned as an era of great inequality.

That’s it for today. I’ll be gone until next Wednesday, and you will be in the hands of Chris Wood again. Also, David Galland will be back for the Friday edition. Thank you for reading and subscribing to Casey Daily Dispatch. See you in a week.

Vedran Vuk
Casey Daily Dispatch Editor