Bernanke has Night Terrors
Research for Online Investors

by John Dalt

2/3/11

Federal Reserve Chairman Ben Bernanke gave a press conference today. He was asked about inflation causing the protests in Egypt. Was it the Federal Reserve’s fault? No, he answered he didn’t see any inflation. Bernanke said, “It is unfair to attribute inflation in developing countries to the Federal Reserve.” His twitch was back, just like when he appeared on 60 Minutes and told us he could raise interest rates in 15 minutes to stop inflation.

We have been warning our readers since last August to sell their long term bonds before interest rates move higher.  When interest rates increase, the value of your bonds go down, and down some more.  How would you like to be in the Federal Reserve’s shoes?  They are now the largest owner of Treasuries…in the world.

At the halfway point in QE2, the Federal Reserve passed China as the largest holder of U.S. Treasuries. China owns $896 billion dollars and the Federal Reserve now owns $1.11 trillion. What is making The Bernank’s lips quiver? The Fed’s assets are worth less today than they were yesterday, and they will be worth less next month and the month after that.

Interest rates are moving higher, and the Fed is stuck.  Maybe not, because they can print money.  But, the Federal Reserve has promised to pull back the punch bowl in the future.  How are they going to cover up their losses?  When QE2 ends in June, they will own almost $1.6 trillion dollars worth of depreciating assets.

We stopped out of our position in AGQ in January.  The headwinds for precious metals killed us.  We are waiting for one more pullback to step back in.  Political unrest in the Middle East gave precious metals a bounce.  We expect gold and silver will fall again if Egypt will settle down.  If the stock market keeps moving higher, money will flow out of precious metals to chase returns.  If the stock market takes a jarring fall, precious metals will get sold to raise money by traders on margin.

Either way, we think metals go lower before the long climb higher starts again.  Precious metal’s ETFs pulled back in January.  Traders had profits to take and waiting until after the first of the year made sense from a tax standpoint.  Traders also saw other commodity trades in agriculture products moving higher for quick profits.

1996 Silver Eagle, 1 oz. $1 dollar coin.

The pull back in precious metal’s ETFs in January didn’t slow down the purchase of bullion.  The U.S. Mint sold 6,472,000 ounces of silver in January.  This was a record month, almost 50% more than any other month in the Mint’s 26-year history of publishing sales.

The market has turned around from this morning's sickness and looks to record a solid gain for the day.  The Bulls just won’t give up!

To the mailbox:
You are trying to capture my attention with your offer to subscribe to the Buy, Sell, Hold Service. My early financial mentor lost many friends and their money with options. He was a community leader and became nearly penniless and attempted suicide, but failed and had a terrible life thereafter. TELL ME MORE…----subscriber D.M.

John’s reply:  We SELL options, we do not Buy them.  It is like being the casino, not the gambler.  This is the greatest game in the world, and safe enough to execute in your IRA.  Call me, I will explain.

Editor’s note:  If you don’t understand covered calls, it is very simple.  We buy good company stocks and ETF’s…then we SELL the right to another investor to buy our stock (at a profit) in the future.  The other investor pays us for this right (option).  It is called a “covered call” because we own the stock we sold the “option” against.  We keep their money, they get the stock if it goes up to the option price, when they pay us this higher price than it is worth now.  If it doesn’t go up, we KEEP their money, and sell another option.  It really is like running a casino.  Learn more about Covered Calls.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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