While charting a potential bullish scenario for commodities in NFTRH 213, I became distracted by thoughts of the deflationary mindset that has been cooked up since 'Bond King' Bill Gross tugged on Superman's cape in the spring of 2011 by announcing his short positions against long-term US Treasury bonds, which was in essence a bet that the monthly EMA 100 boundary (red line, chart below) that had been in force for decades would be broken this time.

Sorry Bill, the inflation cycle into that time frame blew out right on your signal.

For reference, here is our favorite big picture chart once again; the 'Continuum' AKA the monthly view of the 30 year T bond yield.

As the 100 month exponential moving average was approached once again in spring of 2011, the inflationary noise became hysterical. Commodities topped out, the Euro crisis kicked off and European and US policy makers came into play in intense fashion.

Unfortunately for inflation boosters, policy came with an ingenious sanitization aspect to it, with the US Fed discriminating between T bond durations in its buys and sells. Europe's ECB even tried some sanitizing of its own. There is no inflation! Ha ha ha... For reference, the chart above shows the spread between 30 and 2 year T bond yields (shaded areas) AKA the Yield Curve that has been held in check, thereby holding gold in check as well.

Since we're using favorite macro charts in this post, let's pop up another one.

Gold follows the yield curve and the yield curve has been managed by Operation Twist. End of story.

But what is important now? Anyone? Beuller? Yes... what is important now is where we are going, not where we have been. Thus, on the subject of inflation and inflationary signals, here is the 'interlude' that popped up in the middle NFTRH 213...

Macro Geek Interlude (NFTRH 213 excerpt)

The market is getting dangerous ("getting dangerous" Gary? We thought it got dangerous in 2001, or 2007 at least) because the Fed is heavily in play now. Asset markets and the economy are sending signals that the inflation to date is not taking hold. Not in jobs, not in the US stock market (which has stopped going up), not in commodities and not in... precious metals.

So we are back again to Operation Twist and the yield curve. If not for this inflation signal dampening manipulation NFTRH would be going full frontal deflationist now because the inflationary signals are just not there and have not been there since the yield curve operation began. That is not because assets are not going up, but because money supply is not going up. That's a deflationary backdrop folks. Except that money supply is not going up (at least in large part) because the Fed - as it has repeatedly and officially announced - is sanitizing its long-term T bond purchases with sales of equal amounts of short-term bonds. Otherwise, money supply would be going up.

Now we consider that Twist is scheduled to end next month, whether by official decision or a due to a lack of supply of short-term bonds to sell. My guess is it is both. Some think that officials conveniently wanted gold to be held in check through the election. I do not disagree with them.

So if the Fed is going to let Twist terminate, and if they are going to continue to purchase T bonds, and if they are going to maintain ZIRP until 2015, and if they are going to continue MBS purchases, the adjusted money supply is likely to rise.

We will only know if a real deflation is fomenting if they stop meddling with the yield curve, flat out inflate and still the money supply does not rise. Then everybody out of the toxic pool - and I mean out of everything other than physical gold as suits individual needs - and sit happily in cash as we await Prechter's amazing buying opportunity, which would come at pennies on today's dollar.

Until then, deflation has not proven a thing because the appearance of deflationary signals has thus far come with the aid of yield curve and money supply suppression.

Post Script:

Why do some people think the Fed has to try to inflate (to infinity)? Well for one, this chart of the cyclical metal with the Ph.D. in economics vs. the barbarous relic (Cu-Au) shows that if gold has done poorly since Bill Gross inadvertently announced that T Bond yields were about to decline, then copper has done worse. Indeed, the previously inflation-boosted economy has been in trouble since 2006. This is a terrible picture for the economy.

So is the Fed likely to continue trying to dampen inflation expectations or... promote them going forward? Do they have a choice?