Fed Likely Has Eye on Gold

We've been talking for months about inflation and how it's going to be out of control in the future. That may be true, but one thing is certain, the Federal Reserve, which has showered the markets with money, is going to have to watch things carefully. I believe the Fed is watching gold, too. A weak greenback is also troubling, but the Fed is trying to ensure a smooth recovery.

Gold being an alternative to paper assets, the accumulation of the metal is in direct contrast with the Fed's goals. The central bank is aware of it, and will make the adjustment, probably just before it gets out of hand.

What do I mean? The inflation hawks seem to come out to talk up inflation when gold is on the rise. They know the $1,000 per ounce level is an important threshold not to be crossed.

Gold, and its proxy, the SPDR Gold Shares(GLD Quote), has had a massive run from the mid $800s over the past eight weeks, resting now at some support. Conversely, the greenback proxy Power Shares Deutsche Bank U.S. Dollar Index(UUP Quote) has been hammered since early March, at levels not seen since December 2008. The dichotomy continues, thus weak dollar/strong gold makes for a mess of inflation. We could see this unwind soon, which may put fears of deflation back on the table. ...