Fed Stimulus Divide Ignites Gold Prices

NEW YORK (TheStreet ) -- Gold prices popped Tuesday after Chicago Federal Reserve President Charles Evans said further measures to stimulate the economy could be necessary. The rally continued in after-hours trading after the Fed's latest minutes from the Federal Open Market Committee meeting in August showed a growing number of presidents calling for more stimulus.

Gold for December delivery soared $38.20 to settle at $1,829.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,836.40 and as low as $1,786.20 while the spot gold price was jumping more than $44, according to Kitco's gold index.

Silver prices closed 86 cents higher at $41.46 an ounce. The U.S. dollar index was up 0.40% at $73.95 while the euro was down 0.52% vs. the dollar.

Gold prices initially catapulted higher after Evans said on CNBC that more quantitative easing is necessary.

Vote: Where will gold prices finish in 2011?

During the interview, Evans called for more stimulus until the unemployment rate falls to 7% or until inflation surges past 3%. The Fed's threshold is 2% for inflation and raising the limit for higher prices leaves a lot more breathing room for the Fed to take action. Core inflation is currently 1.6%.

Evans does have voting rights, according to the Federal Reserve's Website, but his view will have to contend with others that are more worried about inflation than the possibility of a double-dip recession.

Vote: How High Will Silver Prices Go in 2011?

At the last policy meeting in early August, Presidents Kocherlakota, Plosser and Fisher all voted against keeping rates low until mid-2013, citing inflation and the fact that a lot of the liquidity the Fed has pumped into the market remains sidelined.

This battle was crystal clear in the Fed's latest FOMC minutes released this afternoon, where several presidents called for more stimulus immediately. Among the options floated were more asset purchases, increasing the maturity of the Fed's portfolio -- selling short term securities and buying longer term ones to further promote low interest rates -- or reducing the interest rate the Fed pays on excess reserve balances to give banks an incentive to lend money.

The dissenters, however, blocked any such movement and the Fed compromised with low interest rates until mid-2013. There was also a disagreement as to whether inflation is temporary or more entrenched. Fleeting inflation could strengthen the argument for another round of quantitative easing. The minutes also illustrated that the Fed saw increased downside risks to the economy. Gold rallied another $10 after the FOMC minutes were released at 2 p.m. ET.

This divergence puts a significant strain on the Fed's next FOMC meeting in late September, but Evans' comments were just what investors needed to pile into gold. More liquidity means higher inflation, which means gold makes a better investment than a devalued dollar in the bank.

Adding fuel to gold's fire was Standard & Poor's downgrade of Eurozone 2011 growth estimates to 1.7% from 1.9%. Germany didn't survive unscathed -- its 2012 economic forecast was slashed to 2% from 2.5%.

Some technical traders, however, don't expect gold's rally to last. J.W. Jones, analyst at OptionsTradingSignals.com, is noticing a head and shoulders pattern in the gold chart, which can be a bearish signal.