U.S. Money Supply Soars To All-Time Highs, Shows Inflation Trade Is Still On

by: Simit Patel

A story that has not received the attention it deserves is that the US monetary authorities got started the new year with more of the usual -- inflation of the money supply. The latest release from the Fed regarding MZM -- a measure of the US money supply -- estimates the US money supply at 10,751.1 billion. This marks an increase of over 10% from the first MZM release of 2011.

While I favor MZM as a measure of money supply, for good measure it is worth checking out the Fed's other primary money metric -- M2. M2 also starts the year off at a new all-time high, coming in at 9751.1 billion, which also marks an increase of over 10% from the first M2 release of 2011.

I view this as some of the most significant data points for investors and traders to consider. Most central banks peg their monetary policy to that of the US Federal Reserve, and as the statistics show, inflationary monetary policy is alive and well. Given that this is an election year, the immediate pain that deflation brings will not be welcome -- not by the politicians making empty promises nor by the constituents unwilling to take the medicine of deflation in order to heal. And so, I expect monetary inflation to continue, for it to translate to higher prices -- and for corresponding trade opportunities to emerge.

Two assets that are particularly worth watching for the inflation trade are gold and oil.

1. Gold, now at 1650, has rallied firmly above its 200 moving average, which I think is a particularly bullish sign. Those still frazzled by the the recent downfall in gold and uncomfortable jumping back in at this point can wait for the price of gold to close a week above the 30 exponential moving average, which currently sits at approximately 1681.

2. The price of oil is also reaching an area where momentum traders may rush in to send prices higher. Above 115 marks an area of great volatility -- where there are few resistance areas, as technical traders would observe -- setting the stage for price could quickly rush higher to its all-time highs past $145.

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Of course, outright inflation is not the only risk here; the geopolitical situation is increasing leading to a political shift away from the US dollar, as we recently discussed. These geopolitical tensions, coupled with monetary inflation, could lead to dramatic opportunities in gold and oil, among other inflation trades. As such, I doubt we'll fall below $1520 on gold again, and I doubt we'll see oil below $90 as well. Those prices provide us with a clue as to where stop losses can be placed, in the event the inflation trade is wrong. As for the upside, though, previous all-time highs are a safe target -- though I consider it likely we'll go well beyond them as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.