Gold continues to be bolstered by soaring oil prices that have in turn increased broader inflationary expectations. This is rather significant as it was this concern that was specifically noted as a wildcard in the minutes of the 30-Apr FOMC meeting, which were released yesterday.

Fed forecasts of moderating inflation as the economy slowed were "critically" dependent on inflation expectations remaining "reasonably well anchored." I think we can all agree, with crude prices up nearly 20% in just the last three weeks since the FOMC met, inflation expectations are decidedly un-anchored.

The pass-through effects of these sharply higher energy prices are going to force up the prices of just about everything else. I don't think the economy has truly begun to reflect the realities of $120 oil, let alone $140 oil. The negative impact on the already vulnerable US economy may well be significant.

The DJIA fell over 227 points on Wednesday, weighed by the relentless drag of energy costs. While stocks have gotten a modest boost from this morning's announced drop in jobless claims, the DJIA has been unable to sustain recent tests above 13,000 and the market looks vulnerable.

A closer examination of the FOMC minutes shows significant downside revisions to economic growth along with upward revisions to inflation. Given the aforementioned 'un-anchoring' of inflation expectations, further adjustments to the inflation outlook are likely at the June meeting.

The minutes practically scream 'stagflation', although I can't imagine any scenario where that term would actually be mentioned in an official release.

Stagflation is term that was coined in the 1970s during a period of rapidly rising prices, stagnating growth and rising unemployment.

The combination of the following statements in the same paragraph sum up the Fed's concerns nicely: "[T]he outlook for growth and employment remained weak and slack in resource utilization was likely to increase."

"[A]lthough downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and the fact that some indicators suggested that inflation expectations had risen in recent months."

If we truly are entering into a period of stagflation, gold offers your best protection against the insidious combination of a stagnant economy and rising prices.

Despite the continued risks to growth, the Fed was reluctant to cut rates last month. Although ultimately the Fed did ease by 25bp, the balance of risk was changed to neutral due to the increase in price risks.

It's interesting that the decidedly more hawkish tone of the minutes did little to support the dollar. One could argue expectations that the easing cycle has come to an end with Fed funds at 2.0% have been further solidified. Nonetheless, the dollar index closed below 72.00 on Wednesday for the first time in nearly a month.

The EUR-USD edged above 1.5800, returning additional credence to the long-term uptrend. With more than 61.8% of the decline from 1.6020 already retraced, further short-term tests above 1.6000 are likely.

With inflation surging and the greenback on the defensive once again, gold becomes increasingly attractive as a hedge.

Anyone familiar with the nightmare inflation that struck Germany in the 1920s as the value of the Reichsmark plummeted, will appreciate the special we are running on German 20 mark gold coins.

These coins proved to be lifesavers for those who had the foresight to put some away before economic disaster struck.

Gold Market Movers:

US OFHEO home price index shows prices fell a record 3.1% in Q1. A significant acceleration versus the Q4-07 decline. A total of 43 states registered declines.

US jobless claims for the week ended 10-May fell 9k to 365k. Below market expectations.

Canadian retail sales for Mar +0.1%, below expectations.

UK retail sales for Apr -0.2% m/m and 4.2% y/y. Better than the market was expecting.

Eurozone orders for March -1.0%, weaker than expected.

Pimco's Gross questions validity of government inflation data, suggests bonds and stocks are overvalued.

Oil surpasses $135 a barrel on new supply concerns

Gloomy Fed sends dollar to one-month low

Lehman shares down on loss fears

UBS offers shares at a steep discount to replenish capital