US Dollar is breaking down by Quantitative Easing. GDX, AUY, SSRI, SLW

US Dollar is name of the game now. Inflation is the most desired outcome for the FED. Deflation death spiral with self reinforcing margin calls selling and US Dollar going higher is the lost decade Japan style. We have near Zero rate policy, more then 7 trillion dollars allocated to bailouts, coming auto bailout and Obama's stimulus plan. Slogan of the day is Reinflate and save economy and we will deal with Budget at later stage. On US Dollar Supply side we have almost 2 trillion deficit next year to be financed by Debt sales, ballooning FED balance sheet with low quality assets nobody wants and Quantitative Easing when FED is issuing new money by way of buying Treasuries and other Debt instruments. Expending monetary base is Inflation. QE in recession when products and services GDP are going down in value means more money are chasing less goods - money US Dollar is losing its value. Weaker dollar is stimulating export, inflating out debts. QE is reducing rates for mortgages supporting consumer and its ability to spend.

On Demand side for US Dollars we have a bleak picture: with diminishing panic "safe heaven" status is losing its appeal. With fall in Oil and other commodities prices Middle East, Brasil and Russia do not have spare dollars to spend on treasuries any more. Slow growth of export in China is putting breaks on its ability to increase its holdings of US Debt. But the most important are recently announced three developments which are indicating about tectonic shift in China's desire to Held US Dollars instruments as reserves:

1. Chinese stimulus plan which means that reserves which are held so far mostly in US Dollars will be spend on Infrastructure developments and creating Internal Demand for goods and services. It means buying less or even selling treasuries.

2. Diversification of reserves into Gold to buy almost one year worth of world Gold production. It means selling treasuries. Please note important coincedence: China rumored about Buying Gold and QE started to be apparent with CitiGroup bailout. Treasury is desperate to bring yields as low as possible to be able to sell treasuries to finance this year deficit before Chinese structural shifts will be apparent to the market and put pressure on dollar and bring rising Yields in bursting Treasury Bubble.

3. Very important recent development when China announces about possibility to buy base metals as state reserves. This is what we need to bring inflation back - put a solid floor under commodities prices. Chinese do realise that QE is in a full play now and what it means in the medium term 3-5 years: much higher prices for commodities. They need to secure Supply of commodities to make its stimulus plan work. They need to prevent further supply distraction with falling prices when mines are shut and projects are put on the shelves which means even higher prices for China in the future. It means selling treasuries again and investing in Hard Assets.

You can read on QE and Gold relationship during Japan reinflation efforts here.