Ben Bernanke has long been known by a friendly nickname, “Helicopter Ben”, due to a speech he gave in November 2002 before he became Fed Chairman on the Federal Reserve’s response to deflation.

He said, basically, that the U.S. government could print as much money as it wants:

“But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

He became known as “Helicopter Ben” because of the image of the government dropping money from the sky into the economy.

What is more interesting about his speech on that November day was his discussion of what would happen if the Fed had to drop its interest rate to zero to combat deflation:

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation.

The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.

The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

The rest of the speech is worth reading as well.

Deflation: Making sure “It” Doesn’t Happen Here, November 21, 2002, Before the National Economists Club, Washington, D.C.

Helicopter Ben is doing what he said the Fed could do in 2002. And without actually “intervening” to affect the exchange value of the dollar- the Fed’s actions are doing just that as the dollar has weakened considerably since the Fed’s last interest rate cut.

With all the free money again flooding the system, it will inevitably lead to distortions in the economy.

Many analysts believe the housing bubble will bloom again- as mortgage rates decline to their lowest in the last 40 years.

But that ship has sailed. Never before in history has a bubble that has burst (or is bursting) been halted and re-inflated. This time will be no different.

So where will the distortion show up?

We’re already slowly seeing the results of the events of the last year in the gold market. While gold is off its 2008 highs by about 17%, it is one of the few asset classes that is actually higher for the year. Through Sunday, Dec 21, it was up 5.13% for the year.

Maybe it won’t hold its recent gains going into the end of the year. Or maybe it will.

Gold is up 14% in the last 30 days. Not surprisingly- it rallied sharply after the Fed cut rates to zero.

Everyone is looking for the next bubble but it is already staring us in the face. The precious metals will rally hard as the free money moves through the system and pushes inflation higher in the second half of 2009.

Yes- I said “inflation”- not deflation.

Nearly 30 years after its last boom, gold is poised to again be a mania.

The best ways for an investor to catch the upside are:

1. Owning the metal itself either through gold coins or gold bars (but then where do you store it?)

2. Buy the iShares Gold ETF (GLD)- which actually holds gold in London and trades closely with the gold price.

3. For a more speculative play- buy gold stocks. You can buy a basket of them in the Gold Miner ETF (GDX). This ETF also holds a few silver stocks (which should move higher along with gold.)

GDX is a much more volatile play- as the gold stocks don’t always behave the same as the underlying metal. But in a gold bubble, gold stocks have the potential for the most upside.

As always, be diverse. In this kind of market environment, it pays to be invested in several asset classes (stocks, bonds, precious metals etc.).

Gold partied liked it was 1999 in the month of November (sorry- I couldn’t resist) as the yellow metal gained 14% for its largest 1-month rally since Sep 1999.

Even set against the new record high gold set earlier in the year- November’s gain was impressive.

It was also largely ignored by the media and investors, however, mainly because gold continues to trade well below those all time highs. And the media only likes to talk about something if it’s “new” or a “record.”

Gold closed November at $816.20, still over 20% below its earlier high.

But gold investments are clearly outperforming equities.

The iShares Gold ETF (GLD) is down only 2.61% YTD compared with the S&P 500 which is down 37.66% during that same time period. GLD rose 12.57% in just November alone.

Gold is Up but Gold Mining Stocks are Down

Not all gold investments are created equal. The gold miner stocks have been hammered as the overall stock markets have sold off. The Gold Miner ETF (GDX) is down 42.02% YTD.

However, November showed a turnaround, even in the gold mining stocks. The GDX was up 26.83% in the month, well outpacing the S&P 500 which rose only 8.00% in the same period.

With the trouncing of the mining shares, the GLD, which follows the price of the physical gold, appears to be the much better investment. GLD isn’t going to need to obtain financing during a credit crunch in order to physically retreive the metal (as some gold miners are having trouble doing right now.)

Some Miners Are Interesting Plays

Just like gold itself, not all gold miners are created equal either. You have the junior miners which may have some gold in the ground but no way to get it out.

There are also the big majors- many of which have so much debt they are nearly drowning on bad financing.

Then there is a small, select group of miners that are actually profitable.

Has this sell-off created buying opportunities?

Yamana Gold (AUY) traded as low as $3.31 during the recent sell-off but has rallied off that low. It closed last Friday at $5.81. That is well off its 52-week high of $19.93.

Yamana is a large miner that actually makes money and has a strategy in place to expand production for the next several years. It also doesn’t mine in Africa, which we’ve seen in recent years can be unstable both economically and due to its infrastructure deficiencies (power outages etc).

Barrick Gold (ABX) is another one of the big boys that is profitable. Barrick also is trading well-off its highs. It closed Friday at $29.46 with its 52-week high of $54.74. Barrick also mines silver, copper and zinc for a bit of diversification.

As always, do your own research before investing- especially with the miners which are subject to the whims of developing and emerging market nations.

Will Gold’s Winning Streak Continue?

One month does not make a trend. But gold continues to be resilient as a safe haven during this market turmoil. Gold bullion traders around the world are reporting unprecedented demand for the yellow metal (in coins, bars, and jewelry.)

Eventually, we’ll see this in the price. Gold prices have been pressured by heavy hedge fund selling (due to redemptions.)

While no one can predict the price of any commodity given the global crisis, history has shown that gold has some unique properties that sets it apart.

I wouldn’t bet against it just yet.

(In full disclosure, the author of this article owns shares of GLD, GDX and AUY.)

I was in Holland, Michigan over the weekend and went to the one shopping mall in town, Westshore Mall. If you know Holland, you know it. It has the JCPenney.

Otherwise, the interior stores were rather sparse. (But the mall was recently bought and an extensive rehab is planned which could explain the scarcity of stores.)

But one booth in an empty store caught my eye.

Two men were sitting at folding tables and buying gold.

And two women were selling.

They had scales and were giving out cash for necklaces, rings, earrings etc. Anything with gold in it.

I didn’t ask how much they were paying (I wish I had.) Gold is currently selling at $931 an ounce, but, of course, these dealers would have been buying for much, much less.

But still. If you can get a couple of hundred dollars for selling some gold necklaces you hardly wear, why not?

That’s the difference between gold and the dollar. Gold actually has real value and people are willing to pay for it. If you have gold, as has been true throughout all of history, you can barter it, sell it, or use it as leverage. There’s a reason the explorers came to the New World looking for the much rumored “city of gold.”

Is this a bullish sign for gold?

I don’t remember the last time gold dealers were buying gold in a shopping mall. But clearly, the high gas and food prices are taking a toll.

More on Southwest Michigan and its economy tomorrow.

Gold is at a new all-time high (but adjusted for inflation is far from that.) But the media only cares about “records” and nice round numbers. Once it hit $900, analysts popped up on tv and in the newspapers to discuss how high gold was and where it was going to go from here.

Why is it that if a stock doubles in a year, no one goes on tv to say it’s a “mania”? Yet MasterCard, Apple and others did just that last year.

But if gold is up 30% for the year- then it’s a “mania.”

I’ve seen the “mania” quote several times in recent days and was surprised, after I did a Google search on the subject, to see that the quote was from the same analyst every time.

Here is one from US News & World Report:

Jon Nadler, a Kitco analyst, meanwhile, expects gold prices to remain high for the first part of the year but predicts a pullback in the second half. “The nearly vertical ascent [of gold prices] is starting to look like a mania phase,” he says.

Nadler said “mania” again in an interview with the AP:

“The funds are really heavily at play … The momentum with gold is almost like mania. We keep wondering how high it will go,” said Jon Nadler, an analyst with Kitco Bullion Dealers in Montreal.

Investors looking to get in on the gold rush can expect continued volatility for the rest of the year, said Nadler, whose firm forecasts a trading range of $750 to $950 an ounce.

If you look up the word “mania” in dictionary.com, it comes up with the following definitions:

1. Excessive excitement or enthusiasm; craze

2. Violent abnormal behavior

3. An irrational but irresistible motive for a belief or action

Is this gold right now?

Maybe it’s just me, but I don’t see it. More people are robbing graves for their copper and cars for their platinum. No one is talking about gold at cocktail parties. Old Uncle Joe wasn’t crowing about his gold holdings at the family holiday dinner.

At some point, gold will be in a mania.

But, for now, any call of a mania is, in my opinion, premature.