Right in plain site, the Federal Reserve is doing this to the US money supply. It is a hockey stick with the blade pointing up, but will one day turn into a big, bloated chicken and come home to roost. The Fed’s global counterparts continue apace with inflation as well.

Meanwhile, economic data like M2′s velocity would give out of control monetarists free license to provide more of what they say is good for us, because newly printed money is not getting out into the economy to a sufficient degree. ‘If we can just inflate a little more’ think our myopic bureaucrats, ‘maybe that will finally do it.’

The sanitized story is that our Dear (Monetary) Leader is inflating to get unemployment down (today’s ‘Jobs’ report is a good lurch in that direction) to such-and-such a level and inflation up to such-and-such a level. M2 velocity and other indicators of inflation’s success show that the free money, printed up through legacy debt monetization are probably being hogged up, marked up and/or retained by the ‘first user’ banks to their own benefit. The same banks that in large part caused the systemic problems that the Fed is trying to remedy now.

Yet to the extent that the new money gets out to the general public, it appears the public is using the funds to do the right thing and pay off debt and get current. This is a good thing, but in the public’s hesitance to lever into asset speculation, the signs (outwardly visible price/cost effects) of inflation are just not there… yet. What will happen when the refugees from the 2008 crash transition from personal balance sheet repair to an urge to join the speculative party currently being promoted?

The last two graphs above are pictures of the deflationary backdrop that we might be tempted to believe is in play. The first graph is a picture of full speed ahead inflation being promoted against this. The majority apparently needs price confirmation that inflation is coming, and that could start to happen as households make their transition from prudence to casino mode.

In dropping below important support at 1524, gold has signaled no inflation problem – even though they are inflating to beat the band. US Fed, ECB, BoJ… it’s a free license and powerful, revered policy makers the world over are basking in the sweet glow of adulation and submission by the confused masses.

Here he is once again, just for effect… and especially in light of today’s unquestionably good ‘Jobs’ data. The Fed chairman is winning… duh.

Dear (Monetary) Leader

Gold is on a bear market rebound, which is likely to fail or encounter extreme volatility somewhere at or below the red resistance line on the chart above. I would love to be wrong and indeed, with the fire that our Hero and his friends are playing with (inflation despite an outwardly stable economy; i.e. blatant bubble making), we just cannot know when they will lose control of inflation expectations.

Maybe it will be when the public completes its cycle of austerity, which is a normal reaction to the 2008 near death experience, and starts buying up assets at an increasing pace. Or maybe this very day (jobs) is as good as it gets and deflation will eventually grip and suck the whole construct down in a whirlpool of toxic swill.

But lose control they most likely will because while they can keep things in line over periods that are uncomfortably long for honest money advocates (but are actually quite ephemeral in the big picture of centuries, during which gold has acted as money), honesty will win in the end; even if many of us are dead by the time it happens. 2014 ought to about do it. The macro books always get balanced one way or another, eventually.

Au-CCI Ratio, daily

Gold as measured in ratio to commodities (‘real’ price of gold) is on a rebound. When gold rises vs. commodities, the indication is for economic contraction as the counter cyclical metal out performs positively correlated commodities. Will improving ‘Jobs’ data and the recent okay ISM signal a new down turn in the real price? Stay tuned.

This illustrates just how frustrating the current stock market bull has been. Commodities (see copper) have negatively diverged, gold’s ratio to silver (a traditional illiquidity indicator, when rising) has risen strongly just as anticipated, and yet the stock market – being led by its scouts in junk bond land – has continued to float higher without a care in the world.

S&P 500 & HYG, daily

The indication is that speculation (for officially palatable assets, at least) is alive and well as the Fed has promoted a perceived backstop to any bearish outcomes, giving people the confidence to chase yield ever lower (i.e. take on more risk) without fear of repercussion. Risk on, as they say. A big underpinning I might add has been a still skittish public, as the recent bearish AAII sentiment attests.

I wonder if it is not the public chasing junk bonds, but rather the public’s professional money managers that are chasing yield (risk). This reminds me of 2008, when so many buttoned down professional managers (of pensions, etc.) were exposed after having bought up all manner of dangerous derivative investment vehicles and putting them in the public’s retirement accounts.

Au-CCI ratio, weekly

Back on the gold-CCI ratio, the weekly view shows an ongoing economic contraction that is secular in nature. We have anticipated Au-CCI holding the weekly EMA 300 to keep this trend intact. So far so good… or bad, if you are of the belief that policy makers can actually change economic fate over the long-term with their macro parlor tricks.

Bottom Line

Right now, gold is getting clubbed with the ugly stick known as the lack of inflation’s effects, like rising prices. It is being treated like a commodity. Most people view inflation as rising gas, food and services prices. But inflation is the first graph in this article; reckless money printing with no prudent limits.

They are inflating and the stock market and economy are responding (stock market is bubbling and the economy is not imploding and even lurching toward growth to a very tepid degree). But there is a lot of distortion painted into the macro by policy maker actions (active market manipulation to verbal jawboning), peoples’ misperceptions (gold is silver is copper is oil is corn is hogs… an inflation hedge) and things will just have to sort themselves out… on the market’s terms, not yours or mine.

Gold is fine. It is the only monetary anchor left and this will be apparent when the pretense that policy makers are in control is lost one day. Meanwhile, right minded people will try to have balance and stay intact in order to be on the right side of things when the time to adjust out of this phase of policy maker adulation ends and the inflated chickens come home to roost (inflation) or die on the road back home (deflation).

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