Failing economic policies of the Obama Regime are setting the stage for the next significant rally for $Gold as massive debt monetization becomes necessary. Before going into that though, we need to understand the situation with the U.S. economy. That will allow us to understand how coming Federal Reserve actions will push $Gold above $1,000.

Federal Reserve policies of the past year have managed to put a floor under the U.S. economy. However, those same policies have created the conditions that could, if unchecked, create the next leg down into further recession. That policy could exacerbate the negative impact of the high tax, anti growth policies of the Obama Regime.

And do not be fooled by the quirky economic statistics about to be released. For example, if you are out of work and unable to buy imported televisions and clothing, that lack of buying translates into positive GDP growth. Yes, out of work people by not buying imported goods translates, through the magic of economic math, into positive economic growth. The media will make much of that. Do not let that talk mislead you.

As a beginning, let us consider out first chart above. The blue line of circles, using the left axis, is Federal Reserve bank credit, adjusted for some Treasury related activities. It is essentially the size of the assets on the Federal Reserve's balance sheet. It is the monetary base from which the money supply grows. If it is rising, or increasing, the money supply should grow.

Last Summer, with the U.S. economy collapsing under the financial mess, the Federal Reserve aggressively expanded its assets. Federal Reserve bank credit expanded by $1.2 trillion as it bought financial assets in order to keep the U.S. banking system alive. That translated into a growth rate of more than 100% for reserve bank credit, as shown by the red line which uses the right axis. While in normal time that would have created inflation, it was during this period simply offsetting the deflationary collapse in the financial system.

That trillion plus dollars did stop the U.S. economy from plunging in unending fashion. It does seem to have put a floor under it. But, since the Obama Regime took no action to stimulate growth, it will bobble along the bottom for some time. Unfortunately though, the character of that blue line, Federal Reserve bank credit, has some ominous implications for the future.

Notice that behavior of that blue line which represents Federal Reserve credit. It has been essentially unchanged for months. The Federal Reserve has, on balance, added no net new liquidity to the U.S. financial system since about December. That the U.S. financial system might be starved for liquidity could be soon obvious.

What we have done in the second chart above is project out that growth rate, the red line, if current Federal Reserve policy continues. It is the projected growth rate for Federal Reserve bank credit if it continues unchanged, as it has for some months. While a year-to-year rate of change is not magic, it does give us an indication of what is being done to the system. Another thing done in that chart is that the horizontal axis scale was changed. Instead of using dates in the new part of the graph, we use weeks. That "10" is ten weeks from the current date.

If Federal Reserve policy continues as it is, the year-to-year rate of change in the monetary base plunges from more than 100% to 0%. That action would be the equivalent of cutting the engines on a jet airline traveling at 350 per hour at 30,000 feet. The impact on the U.S. economy could be dramatic.

In fact, no one can truly predict the implications for such a monetary policy development as this has never happened before. However, we do know that the second derivative drives all. That is the picture of a second derivative turning wildly negative, with the associated negative implications for the economy and financial markets.

But, you see, the Federal Reserve will act before then. It will again be forced by the political power structure to add liquidity. In fact it may have already started, given the massive debt monetization performed last week. By the way, that liquidity injection was what sent U.S. equity markets up so strongly last week.

With the deficit of the Obama Regime running at more than a trillion dollars, the Federal Reserve will have no choice. Another massive injection of liquidity, given the failing economic policies of the Obama Regime, could explode onto the economic scene this coming Fall. The implications of that development for the value of the U.S. dollar and $Gold should not be ignored.

In summary, another massive injection of liquidity by the Federal Reserve is a near certainty as the calendar moves through the second half of the year. Foreign investors have for some time indicated a growing unwillingness to finance the failing economic policies of the U.S. The Federal Reserve may have to monetize a half trillion dollars of U.S. debt in coming months. That flood of dollars can only send the value of the U.S. dollar down on foreign exchange markets. With that development will come a renewal of the bull market in $Gold. The Federal Reserve and the Obama Regime may be only months away from making $1,000 the new floor for $Gold.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to http://home.att.net/~nwschmidt/Order_Gold_GETVVGR.html.