It’s too early to say what trend will define the Bernanke era of central banking, but the bull market in gold may get a footnote or two once the final history is written. Indeed, the precious metal is soaring, suggesting that something less than unwavering faith prevails when assessing the odds of success among mortal beings charged with defending the integrity of paper currencies.
As of yesterday’s close, gold has climbed 10% so far in 2006. Catalysts driving the metal higher come in two basic flavors: geopolitical and economic. The obvious suspects in the former include rising anxiety over any number of Middle East tensions (Iran’s nuclear program, Hamas’ election in Palestine, the ongoing terrorism in Iraq, etc.) The economic worries start with the red ink that defines America’s budget and trade ledgers, and move on to the ongoing elevation in the price of oil, which some say portends higher inflation.

“Rising oil prices will continue to keep gold prices buoyant this year as it’s likely to lead to inflation,” Ross Norman, an analyst at TheBullionDesk.com, tells Bloomberg News today.
A degree of sympathy for Norman’s view can be found in Fed funds futures trading, where the CBOT’s April 2006 contract is priced in anticipation of another 25-basis-point rate hike when the Fed convenes again on such matters next month.
It’s worth noting too that gold’s ascent in 2006 comes amid fresh weakness in the greenback, which has shed 1.8% this year through yesterday’s close, based on the U.S. Dollar Index.

All of which raises a burning question for investors these days, namely, can the Fed keep inflation contained while staving off a weaker dollar and without derailing the economy? Finding the sweet spot for success on this front will prove tricky, if not elusive. Indeed, clear and concise signals on the economic front are lacking at the moment. For example, last week’s surprisingly weak GDP report for the fourth quarter has been followed this week with a number of new releases that paint a profile of ongoing economic strength.
Consider, for instance, this morning’s update on jobless claims reveals that new fillings for unemployment insurance were a relatively mild 273,000 for the week ending January 28. That’s the third week in a row for claims below 290,000, a trend that economists say reflects rising demand for workers.
Meanwhile, yesterday’s release of the ISM index of manufacturing activity for January documents the continued expansion of the sector. Additional support for making the case that economic growth will roll on comes from the update on December’s construction spending, which rose 1% over November–the fastest pace of increase since September.
It’s easy to be optimistic, or pessimistic. It just depends on whether you’re willing to keep the blinders on and stay focused on the data releases that confirm your particular worldview.