"Would you add Sprott Physical Gold Trust (PHYS) to the chart library? What a fantastic resource this is!

"Glad you are coping whilst David is gallivanting around the US. What have we missed on QE2? Everyone is assuming it is coming and it will be "large". I wonder...The US equity market is very close to resistance and the "emergers" are on a roll; all assuming lots of cash to extrapolate the trend. No technical signs of a breakdown...yet."

Eoin Treacy's view Thank you and I'm sure David is looking forward to getting back into the thick of it next week. I added the Sprott Physical Gold Trust to the Chart Library but it is underperforming the gold price by a significant margin.

It might be instructive at this time to review Ben Bernanke's speech at Jackson Hole in late August where he said that three primary tools were available to policy makers in combating deflation. These were purchasing long-dated securities, altering the wording of Fed statements and potentially lowering the interest rate paid on deposits at the Fed. (Also see Comment of the Day on August 27th).

This article by Caroline Salas and Joshua Zumbrun for Bloomberg carries some more up to date comments by the Fed Chairman and may also of interest. Here is a section:

Fed officials, concerned that expectations of lower inflation will become self-fulfilling, are debating whether to encourage Americans to believe that prices will start rising at a faster pace so that they would spend more of their money now, the minutes from last month's meeting showed. That would reduce inflation-adjusted interest rates and stimulate the economy.

"Central bank communication provides additional means of increasing the degree of policy accommodation," Bernanke said. "A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect."

The Fed will pursue whatever inflationary policy it deems necessary to avoid deflation, which is seen as by the far the greater threat to the economic health of the USA. The Fed's favoured PCE deflator (the clue is in the name) under estimates inflationary measures by assuming that if the price of something goes up, people will simply switch their purchases to something else. By excluding food and energy which are inconveniently volatile and which are next to near impossible to switch purchases from, they successfully come up with an inflation measure that ignores inflationary pressures. That is of course until they are so high that they force people to switch necessitating aggressive action to combat inflationary pressures.

The continued decline in US house prices and dismal employment figures mask the surge in food prices over the last year and the increase in capacity utilisation. Energy prices have been rangebound for a year but are also threatening to push higher. This suggests that stagflation could be a much more relevant medium-term threat than deflation.

The Fed has already made significant purchases of US Treasuries. One has to ask what they might seek to achieve by buying even more with yields already close to historic lows. Prices have in fact fallen on today's announcement and would need to sustain back above 135 to question potential for continued medium-term top formation development.

The US Dollar has been in a well defined downtrend for much of the last four months, as the threat of additional quantitative easing was priced into the market. However such has been the speed and extent of the decline that a massive raft of QE measures would need to be announced to justify the move and this is far from assured. In addition the dollar's decline will have helped to achieve some of the Fed's aims in creating a more competitive environment for the USA export sector and thus moderated the need for QE.

Gold and silver have been hitting historic highs at least in part reflecting investor disillusionment with the debasement of fiat currencies. Central bankers will not be ignorant of the precious metal price action and will be sensitive to the message this is sending on investor attitudes to quantitative easing.