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) - Get Report

, 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) - Get Report

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.

Besides the lip service, the Fed has its trigger on the liquidity exit button and won't be afraid to use it. And while the Fed may not say it, liquidity can be drained quickly.

Clearly the Fed will keep the liquidity sloshing around until the economy really improves, not just "green shoots" but perhaps the makings of a new lawn, then the mower comes out. At this point, the Fed is in control whether we like it or not.

Bob Lang is a senior analyst and portfolio manager at

BigTrends.com

. He manages subscription services for the firm and writes timely articles about markets, trends and the economy. Lang's articles can be viewed on numerous sites on the Internet. Together with renowned market timer Price Headley, Lang has helped build his supported products into a winning class. He participates in a coaching forum for advanced traders in which he teaches his unique style of trading.