SPDR Gold Trust (GLD)

Gold's correlation with oil has been above 75% during the past few months, an UBS analyst said, adding that “a stronger oil price and weaker dollar environment could spur on more momentum buying in gold.”

The Fed's intentions are clear, rates are headed lower. And no matter how you slice it, lower US rates only reinforce the downtrend in the dollar. So, while the dollar may be poised for a crowded trade, short covering rally, the mega and cyclical trend is unmistakable: Down and dirty. And the dirtier the dollar gets, the less inclined foreign buyers will be to own more of a poor performing asset and more inclined to diversify their holdings. Witness the rise in sovereign wealth funds. Providing a rise for the Euro and Gold.

In effect, the U.S. government is trying to put out the fire with gasoline: Spending unconscionable amounts of money that it does not have, and financing that spending with record levels of debt. The short-term results of a boost in activity will be extremely costly.

Under this scenario, with a depression not in the cards, the market is rallying to adjust to mere recession pricing. But are we out of the woods? The rampant spending and overzealous monetary easing will result in – you guessed it – inflation.

The Fed’s claims that it is ready and willing to act quickly in order to contain inflation when it finally appears just don’t seem realistic at this point. As a central bank that had to resort to such extraordinary measures just to sidestep the death spiral, could you really risk tightening the reins too much and too soon? No way. The Fed will have to be very slow in taking back the liquidity with which it has just flooded the market.

After all, it is much easier to spike rates later to stop inflation than to deal once more with a crumbling financial system.

Monetary management is more of an art than a science. The Fed doesn’t really know how much time – and to what extent – it will take for their measures to impact economic activity. It is driving while looking into its rearview mirror. And with this amount of financial adrenalin and imbalances being corrected in the system, the likelihood of a monetary “soft landing” is slim to none.

This brings us back to gold.

With this prognosis, we know that the government’s policies will succeed in achieving what it truly intended: Creating inflation.

Therefore, gold is a necessary component of almost any portfolio. The problem is that the iShares SPDR Gold Trust ETF (NYSE: GLD) already has accumulated more gold than the rich countries of Switzerland or China. That means any move from the masses of investors to leave the metal will have a huge downward effect on it.

Investors are more prone to hedge the falling dollar with positions in gold. High activity of preemptive hedging and not inflation might be the true short term cause of increases in gold's value. Over the last few years many large countries have stated serious interest in stockpiling gold and other reserves in the Euro opposed to the Dollar.

The Fed's intentions are clear, rates are headed lower. And no matter how you slice it, lower US rates only reinforce the downtrend in the dollar. So, while the dollar may be poised for a crowded trade, short covering rally, the mega and cyclical trend is unmistakable: Down and dirty. And the dirtier the dollar gets, the less inclined foreign buyers will be to own more of a poor performing asset and more inclined to diversify their holdings. Witness the rise in sovereign wealth funds. Providing a rise for the Euro and Gold.

As long as there isn't much of a downside to gold prices, one can make 20% owning GLD and selling calls against it. The downside is that gold can fall in price or it can rise enough to have your GLD shares called away from an investor.