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If the addition of $45B per month of unsterilized counterfeiting doesn't juice inflation, I don't know what will. The FOMC has now committed to creating $85B per month out of thin air at least until the U.S. unemployment rate drops to 6.5% or inflation expectations exceed 2.5%. Barring an acceleration of these efforts, the FOMC will be counterfeiting $1,020,000,000,000 per year. That number should scare the hell out of anyone hoping for a stable economic future.
With the removal of the sterilized half of the $45B of Treasury purchases, Operation Twist has become Operation Shout. Many traders will now become transfixed with unemployment and inflation rates, trying to determine when the Fed may mitigate efforts. However, such a focus would be misguided. Those economic figures are terribly manipulated... no one with any sense believes that inflation is currently under 2.5%... and the Fed snuck in a couple of phrases to provide themselves loopholes.
First, the FOMC statement preceded those targets with the phrase, "at least as long." In other words, they could stop counterfeiting operations when unemployment drops to 6.5%, but they could also print longer on a whim. Second, the Fed ties the inflation number to a one or two year projection. So if the CPI is published at 3%, the Fed will not react so long as their forward-looking inflation rate remains under 2.5%... and, of course, a projected rate is more malleable than the CPI itself.
Given these lexical loopholes, as well as Bernanke's propensity to print, chance would seem to favor an acceleration of bond purchases rather than a mitigation as the FOMC's next step. These actions also fit quite nicely into the cyclical view for commodities.
Commodities are only 6 months into a new 3-year cycle. This cycle should work its way above the 2011 peak... perhaps far above... over the next 18 months or so. The FOMC's fervent printing efforts will certainly pose no impediment to this outlook.
The commodity cycle, as well as the monetary efforts, should also prove very bullish for gold.
The antics traders suffer when price is working through a basing pattern can be quite wicked. However, once a breakout arrives, gold should develop a trending move to put the 2010-11 run to shame.
The Fed is printing money with the stated purpose of increasing employment. Ironically, any success they may witness could be self-defeating as an economic upturn would give velocity to trillions of new dollars, thereby stoking inflation and perhaps crushing a nascent recovery anew. A dangerous game is being played by that revered cabal in Washington. As citizens, we can only watch carefully and hope for the best. As traders, however, we can try to protect ourselves from these effects in the markets.