Gold fell in US trading hours yesterday for no apparent reason; but on the Fed announcement, gold surged by nearly 7% in afterhours access trade. Gold leapt from its session low of $884.10/oz to a high of $946.20/oz, a jump of nearly 7 per cent and silver also surged some 7%. Gold subsequently gave up some of those gains but remains firm over $934/oz.

The Federal Reserve’s plan to buy billions of dollars worth of their own government bonds, agency debt and Treasuries in an unprecedented act of debt monetisation valued in the low trillions, saw a somewhat muted response from stock markets which rose somewhat (US markets were up between 1% and 2%) and commodities which were mixed with oil, down after the announcement.

The Fed will print up to $300 billion to buy long-term government bonds and print an additional $850 billion to buy mortgage-backed securities issued by the discredited and now nationalised Fannie Mae and Freddie Mac ($1.15 Trillion in total).

The Federal Reserve’s plan is extremely high risk and astute observers are very concerned regarding the potential for very significant inflation in the coming months. This explains gold’s surge in value after the announcement.

The huge scale of the debt monetization is unprecedented and may lead other central banks to follow the Federal Reserve leading to competitive currency devaluations which could result in an international monetary or currency crisis. The Federal Reserve is creating trillions of dollars in order to buy their own US national debt which resembles the monetary policies of Third World banana republics and will likely lead to a severe depreciation in the dollar in the coming months. Talk of the dollar becoming confetti is hyperbole but the US authorities had better be careful that in their desperation to allay deflation they do not release the virulent forces of stagflation and even hyperinflation.