After the financial market collapsed last fall, the Fed responded with a massive injection of liquidity and expansion of the monetary base.
Eventually, Ben Bernanke & Co. will face the challenge of having to remove that liquidity from the system. "That's a big and difficult task and probably the authorities will not be able to do it well," says legendary financier George Soros, chairman of Soros Fund Management. "That's the fear that drives people into gold."
Soros wouldn't say whether he's actively trading gold but certainly implied it's a good bet; more explicitly, he agreed with the view there's a "bubble" in Treasuries that's likely to burst sooner rather than later.
"The moment this fear of deflation turns into a fear of inflation, you'll find interest rates rise in the long end which is going to choke off the recovery," he says. "If we are successful [in reviving the economy] we are heading from the prospect of deflation to stagflation."
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