Jack Kemp

It may be too early to tell but it could be we have seen a leveling off of the gold price and maybe even a downward break away from its recent high.

If so, we are at a turning point for monetary policy at just the moment a new chairman, Ben Bernanke, takes over at the Federal Reserve Board.

The danger is that the new Fed chairman could squander this golden opportunity to place gold back at the heart of monetary policy. If he fails to watch the price of gold and other price-sensitive indicators as signals of future inflation, and instead relies on faulty demand-side theories of "capacity constraints," "cost-push" inflation and watches backward-looking price-indices, he easily could lead the Fed to make the opposite mistake Alan Greenspan made at the end of his tenure, when he kept interest rates too low for too long. Mark my word, there is more inflation and market turbulence to come as a consequence of the Fed's excessively loose monetary policy during the past several years, and the sooner the Bernanke Fed accepts it can do nothing about this Greenspan inflation and looks to the future, the better.

The price of an ounce of gold peaked at around $572 on Feb. 2 and fell pretty much continuously for next two weeks down to $540 on Feb. 15 - the day the new Fed chairman testified before Congress' House Financial Services Committee.

The price of gold immediately began rising again, and as I write this column the price is back up to $556. Markets could not help but notice that Mr. Bernanke in his testimony did not even mention the price of gold nor did he make reference to other price-sensitive indicators of inflation.

Indeed, Mr. Bernanke seemed to go out of his way to debunk anything resembling a price rule of forward-looking commodity prices with gold as inflation predictors for calibrating the amount of liquidity the Fed injects or withdraws from the economy: "Over the past few decades, policymakers have learned that no single economic or financial indicator - or even a small set of such indicators - can provide reliable guidance for the setting of monetary policy."

Mr. Bernanke, I'm afraid, has grievously misread the historic record, and his outright rejection of a price rule approach to monetary policy was, in my opinion, a most inauspicious beginning to his term as Fed chairman. By spiking the price of gold up, the gold market sent the new chairman a raspberry of its own, a direct consequence, I believe, that the market anticipates further inflation errors to come from the Bernanke Fed.

Jack Kemp

Jack Kemp is Founder and Chairman of Kemp Partners and a contributing columnist to Townhall.com.
TOWNHALL DAILY: Be the first to read Jack Kemp's column. Sign up today and receive Townhall.com daily lineup delivered each morning to your inbox.