The gold price closed down $42.58 to $1,095.52 per ounce on strength in the U.S. dollar as the price of gold and gold stocks continued to face severe selling pressure. The U.S. dollar index, up 0.733 to 77.728, closed at its highest level in over three months. The Market Vectors Gold Mining ETF (GDX) followed the gold price lower, as it finished the day down $3.01, or 6.24% to $45.20 - and is now down 18.4% from its high print of $55.40 on December 2. Canada’s S&P/TSX Global Gold Index closed off to 16.77, or 4.8% to 332.46, a 15.9% plunge from its early December high.

Yesterday’s Federal Reserve Open Market Committee (FOMC) produced few surprises as the Fed made only minor changes to its policy statement. Chairman Ben Bernanke and the Board of Governors left the target range for the federal funds rate at 0 to 0.25% percent - and maintained the clause “extended period of time“ in reference to its intention to keep interest rates at exceptionally low levels. The committee continues to press ahead with an aggressively loose monetary policy in spite of the recent improvement in economic data and dramatic rise in asset prices over the course of the past nine months.

A growing contingent of investors have become concerned about the potential for inflation to ignite given the wide array of monetary policies initiated - punctuated by the Federal Reserve’s quantitative easing program, which have resulted in a $2.2 trillion balance sheet at the Fed. Bernanke and the committee continue to reiterate their expectation that inflation will remain restrained for “some time.“ This expectation comes despite statement remarks that since November, data suggests that “economic activity has continued to pick up and that the deterioration in the labor market is abating.“ The policy statement was careful however to balance this positive data with some negative trends, as it stated that household spending appears to be growing moderately but remains constrained by a difficult labor market, marginal income growth, less housing wealth, and tight credit.

The FOMC went on to point out that it is steadily reducing the rate of its purchases of $1.25 trillion of agency mortgage-backed securities and roughly $175 billion in agency debt. The committee expects these transactions to conclude by the end of the first quarter of 2010. In further addressing other initiatives, the FOMC also stated that most of its special liquidity facilities will expire on February 1, 2010, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. Lastly, the Fed reiterated that the Term Asset-Backed Securities Loan Facility remains set to expire on June 30, 2010 - the program providing loans backed by new-issue commercial mortgage-backed securities. On March 31, 2010, this program will expire for loans backed by all other types of collateral.

The Federal Reserve continues to focus its efforts on counteracting the deflationary impact that has emanated from the credit crisis and the ensuing recession. At the same time the Fed is promoting inflationary policies it is assuring the marketplace that inflation expectations will remained contained for the foreseeable future. This verbal intervention has helped to keep the bond vigilantes at bay, resulting in low bond yields further out on the curve.

Most economic data points indicate that price inflation has been relatively benign, but the impact of all the money creation in the U.S. as well in other nations has the potential to create a more vicious rise in the price level in future years. Yesterday’s Producer Price Index (PPI) data came in higher than expectations, although it is much too soon to know whether this is the beginning of a new trend.

The bottom line is that that Fed’s primary objectives remain targeted at fighting deflation. Consequently, as long as Bernanke and the FMOC are committed to generating inflation, the more investors and traders should be concerned about a larger inflation problem down the road. Betting against a central banker with a printing press could be hazardous to your financial health - a fact that keeps the macro-economic climate for the gold price and gold mining stocks very supportive for higher prices looking out in the future.