Two Moves to Make as the Fed Inflates the Commodities Bubble

7/2 - "U.S. Federal Reserve Chairman Ben S. Bernanke ignored the warnings of most economists last week, and kept the benchmark Federal Funds rate at 2%, far below the actual rate of inflation.

As a result of this non-move, investors can probably look forward to having the global commodities boom continue for at least a while longer."

"The reason for this intense advance in commodity prices is that the Fed and its European counterpart have been pumping money into their respective economies to prevent the collapse of several major banks...In the key emerging markets, the money supply has been rising even faster - 19% in China over the past year, and 21% in India. Not surprisingly, those countries’ inflation rates are taking off, with India into double digits and China quickly getting there."

"...even if the (U.S.) inflation rate is truly only 4%, the Fed’s monetary policy is dangerously inflationary; if it is actually 7%, giving a real Fed Funds interest rate of minus 5%, then prices can be expected to take off like a rocket - as they are already in the commodities market...It’s highly unlikely that (Bernanke will) raise interest rates before Aug. 5, which is when the Fed next meets...Thus, for the next several weeks, it’s highly likely that the commodities “bubble” - which is clearly what this has become - will grow in both size and scope."

"Investing in the late stages of a bubble is highly speculative. Nevertheless, I reiterate my prediction of a few months ago that gold will reach $1,500 an ounce...I would consider SPDR Gold Trust (formerly StreetTracks Gold Trust) shares (GLD) about the most efficient way of getting a pure gold play. As an alternative, you might consider a silver investment: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (SLV) seems the best way to play silver directly."