Gold prices got hammered last week after Congress’s passing of the bailout bill boosted the dollar. Spot gold fell as low as $825 per ounce. However, gold futures rose more than 3% this morning as investors sought safety from tumbling global equities. Gold bug Ed Bugos says gold prices could be about to skyrocket. The Fed is increasing bank credit at an unprecedented pace.

The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has ‘created,’ totaled less than $700 billion at the turn of the millennium, and continued to expand by about $50 billion per year after that, up until this month.

In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base.

Up until September, the Fed has been careful to sterilize its liquidity provisions by selling Treasuries or reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity. But the NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air… unsterilized.

This number is unprecedented. It is difficult to predict gold’s short-term response to this shock, but the market cannot ignore the fundamental effect of this crackup for long. With interventions like this, we should get a few more $100-up days soon enough.”

PS: If you’d like some help picking the best gold stocks, check out Ed’s Gold & Options Trader