The Fed Threatens to Take the Punchbowl Away as Inflation Plays are at Inflection Points

The price of gold is poised to break above a trend line connecting the March 2008, March and May 2009 highs. Above this line lies a break out to multi-decade highs which would be the most telling sign yet that central banks around the world have printed enough money to insure unbridled inflation.

Not uncoincidentally the US Dollar is breaking down, as clearly seen on the Dollar Index (DXY0). In the eyes of inflation players a significant move lower, which is threatened, would be the comeuppance for a US government that has done everything in its power to invite a collapse of the currency and a soaring in the price of all things priced in dollars, leading to an ugly bout of inflation and an unwelcome 1970’s redux.

Our Fed is no doubt the most egregious offender of all central banks. But Fed chairman Bernanke has said he has an exit plan and if rumors are true he is about to put it into effect. Don’t look now, inflation players, but The Fed could soon be taking the other side of your trade. That’s a fight we wouldn’t enjoin.

Yesterday afternoon Bloomberg reported that former Fed governors Gramley and Meyer surmised that the Fed will announce next week the halting of “quantitative easing,” the policy by which the Fed continued applying easier monetary policy after lowering interest rates to zero by buying US Treasury debt. This policy, of course, further aggravated market fears about the US monetizing its own debt and stoking an aggressive inflation.

While former Fed governors are not definitive authorities they are likely well informed and the Fed could well be using them to “float a trial balloon” regarding policy. We think the market would welcome this decision.

Ending quantitative easing is just the first step in firming up monetary policy. Further steps are unlikely to follow quickly as Bernanke himself has recently mentioned that he intends to maintain a zero interest rate policy into the foreseeable future. But this first move might well be enough for now to soothe inflation anxieties, supporting a dollar which is at a precipice and taking away gold’s juice, just when the party was about to get into gear.