The Federal Reserve announced on Wednesday that it will be implementing $850 to $900 billion in quantitative easing by the end of quarter two of 2011.  This is a combination of $600 billion in newly created money, and $250-$300 billion in reinvested payments the Fed receives on securities it already owns, which puts the total near the $1 trillion mark.  The announcement followed the FOMC meeting in which they determined that the economic recovery is too slow.

Quantitative easing is code word for money printing.  It takes away from the purchasing power of the dollar through inflation.  If you believe the mainstream media and think inflation isn’t happing check out how much prices have risen in other commodities within the last 60 days.  Cotton prices are up 54%, corn prices are up 29%, soybean prices are up 22%, orange juice prices are up 17%, and sugar prices are up 51%.  This will lead to all food prices rising as corn, soy and sugar are in just about everything we eat that is mass produced.

Big money knows what is really going on and is buying gold in a big way.  Large institutional buyers (hedge funds, foreign central banks, etc) are buying gold but the general public isn’t sold yet.  The public is always the last to the party.  Gold is up over $32 per ounce this morning on the news of QE2, and it is no surprise.  Inflation is coming and institutions with large amounts of dollars want protection.

Gold is the ultimate insurance against inflation.  Over time it tends to hold its value.  One ounce of gold today buys roughly the same amount of loaves of bread as it did 100 years ago.  Sure there are fluctuations, and purchasing power is impacted, but over the long-term gold keeps up with inflation.  Once the general public comes into the gold market in a big way we will begin to see the beginnings of a gold bubble, as prices will rise dramatically and within a relatively short period of time.  This is when investors take advantage of overvaluation and sell their gold in order to take a profit.

QE2 is just an indication of what is still to come.  I believe we will see many more rounds of QE in the future.  The government has all ready made the decision to take the road of money printing and it is a very hard ship to turn around once it is going.