Fed Minutes Send Gold, Equities Flying

Somewhat counterintuitively, both equities and gold rose sharply today after the FOMC release of its September meeting's minutes.

However, gold should be viewed slightly differently in its rise versus the rise in equities.

First, though, the minutes were dovish beyond predictions.

"Not only are they not ready to raise rates, they don't even want people to think they're ready to raise rates, so it's not even on the radar screen," said Ward McCarthy, chief financial economist at primary dealer Jefferies Group LLC in New York.

Leading the flight of the doves, Minneapolis Federal Reserve Bank President Narayana Kocherlakota believes an improving employment picture alone isn't just reason enough for the fed to boost interest rates. He said the Fed must put more focus on the rate of inflation. He forecasts that inflation will continue to fall short of the central bank target of 2% for the next three years, and until that outlook changes, the Fed shouldn't be considering raising interest rates.

"Just because unemployment is falling that's not a reason to raise rates," Kocherlakota said. "There is no harm in having low unemployment in the country except in so far as that generates wage pressures and that shows up in inflation. But I don't see that in my inflation outlook."

Finally, he said that the best predictor for inflation is the relationship it has had in the past trailing the Fed benchmark rate. And we know that it is stagnant, at best.

Gold - helped by the dollar's decline today - also took advantage of Europe's struggles economically. Until the E.U. acts concretely and vigorously to stimulate the zone's economy, the dollar will remain soft. We cannot predict the European Central Bank's timing, but we believe it will be the end of this month or in November that all the t's are crossed and i's dotted on the constituent country's mutual approach.

Even with the droopy dollar, oil fell yet again today, slipping below $88 per barrel. Obviously that means gold and oil have decoupled. Interestingly enough, in the midst of a period that has seen a drop in oil crude and Brent, the U.S. exported its first 400,000 barrels of American oil for the first time in four decades. This is good for the overall trade balance and certainly strengthens America's economic position in the world.

Helping gold, too, was some bandwagon buying, former shorts now turning around - perhaps a little late - to go long. Silver is coming along for the ride.

The two precious metals are both up about 1.25% in late afternoon trading in New York.

As always, wishing you good trading,