Fed chairman Bernanke defies gold

Mr. Bernanke's first move as Fed Chairman will be an historic one. Not only did he drop the Fed Funds rate by 50 bps, but he did so in the face of gold breaking out in a major way. As the U.S. stock market was booming on the Fed's decision, gold also rallied, hitting $723 in yesterday's trading, up from $650 in mid August. The metal has also broken through its major resistance level at $690.

While gold has been going through a major bull market this entire decade, one would expect inflation to be going higher and bond prices crashing, similar to the 1970s. But that has not been the case. While there was some inflation as the economic expansion aged, it was by no means hyper-inflationary.

Are gold and equity prices now correlated? It sound crazy, but that is the way they are trading now.

One warning. Gold is an eerily correct commodity; do not dismiss its ascent lightly. While equities will continue to rally for a while, keep an eye on gold. It is telling us there is plenty of cash around the world. And history tells us when there is plenty of cash around the world, people will do some unwise things with it.