Have We Hit Too Much Liquidity?
By now it is no secret why the stock market goes up on a virtual flatline. In case there is any confusion, the almost daily release by the NY Fed of such excess liquidity tidbits should clue one in. Yet, in its over-zealousness to pump up equity markets, has the Fed gone too far? Are all the billions of free dollars now tired of chasing the risky and safe assets (at the same time... yes, think about that for a second) and going straight into gold, be it as a dollar crash backstop or simply because all other assets have run up beyond too far? The one asset class that is riskiest to the Fed from an appreciation stand point is, and has always been, gold. Yet the market action from the past two weeks should make the Fed nervous. After meandering in the $900-$1,000/ounce range for a long time, gold has finally exploded and started closely correlating with risky assets.
In fact a long-term chart of the S&P expressed in ounces of gold, demonstrates that we are once again starting to approach the 1.00 barrier. If this support level breaks, the upside moves in gold will likely make the Fed consider other alternatives to stimulating inflation than mere paper printing. Alas, not many come to mind. The counterargument would go that the Fed has (un)officially abandoned the strong dollar policy, and any claims to the opposite are merely for soundbite purposes before the camera. Since this would merely be a preamble to a hyperinflationary episode, gold would become very valuable to the administration, for that point in time when the first round of dollar devaluation cracks (about where you would pay a few hundred million dollars for a bottle of milk). Thus the prevention of hoarding of gold, and its outright sequestration, in many ways comparable to what FDR did with Executive Order 6102, will be the next big step, once the Fed starts projecting forward what needs to be done as the initial bout of hyperinflation needs to be contained. At that point, as always, the amount of gold held in various underground bunkers will determine the new price point of the dollar's far more valuable, post hyperinflationary descendant.