Silver takes a shine to Bernanke

December 7, 2010, 1:36 AM UTC

The commodity pits aren’t buying what Ben Bernanke is selling.

All manner of commodities took off Monday after Bernanke appeared on 60 Minutes to explain why expansive Fed policy won’t set off an inflationary spiral.

Hitting the motherlode

With tighter labor markets nowhere in sight, his case makes sense to me — but obviously not to everyone. Many fine people, judging by Monday’s action, raced to purchase commodity futures in anticipation that Bernanke will succeed if nothing else in driving down the dollar and therefore raising the prices of gold, silver, copper, oil, burlap – you name it.

Gold hit a record closing high of $1,418 and silver traded near $30, at levels last seen 30 years ago in the runup to the infamous Hunt Brothers episode of 1980, in which two guys tried to corner the market for silver without notable success.

Silver hit $49 and change that year, and some precious metals believers insist that with Bernanke doing his magic and the euro zone on what looks an awful lot like a precipice, it can get there again.

And of course no one has any idea what will go on in the commodity markets at a time when central banks around the globe are being pressed into service to battle a deflationary dragon they helped create with their too-easy policy when times were better.

But those who believe gold and silver and wool tops and whatnot will make a straight line higher should consider what they are betting on. Bernanke is understood to welcome a weaker dollar as a way of getting inflation to snap out of its stupor and push asset prices and household wealth higher.

But isn’t it possible that in the face of all the supposed dollar-crushing Fed laxity going on out there, that the dollar will keep strengthening?

It certainly seems plausible now, what with the euro area on the verge of a nervous breakdown and export-minded economies in Asia not ready to let their currencies float. And a look at Japan, which has been trying various flavors of QE on and off for more than a decade, hardly supports the thesis that the Fed can drive the dollar down just because it sort of wants to.

“Not only did printing money fail to break deflationary expectations, it failed to keep the yen from rising,” Bianco Research strategist Howard Simons notes in a recent post.

But by all means, place all your chips on the commodities against the dollar trade.

After all, Bernanke never fails to accomplish what he sets out to do. The inflationists are always saying as much.