Gold Bumping Along the Bottom

Gold continues to bounce along the bottom, weighed by a firm dollar, which in turn is being buoyed by the ongoing exodus from the bond market. Today is also options expiration for the COMEX July gold contract.

Some generally good data today seems to bolster expectations of QE tapering later this year. The Case-Shiller index and the FHFA home price index both posted gains in April, indicative of continued recovery in the housing market. However, April was long before 30-year fixed mortgages pushed decisively back above the 4% level and started testing 5%.

May durable orders were solid, as was June consumer confidence, but again this was before the Fed pricked the bond bubble, sending rates surging and stocks tumbling. A New York Times article, picked up by CNBC, suggested the exit from the bond market is turning into a stampede.

In an ABC News interview in Australia, Tangent Capital Partner's James Rickards suggest that all the tapering talk is in fact just talk. Rickards points out that "the fundamentals of the U.S. economy are in terrible shape and there’s actually great risk of deflation, which is the Fed’s worst nightmare.”

Rickards suggests that those weak fundamentals will become readily apparent around August or September, at which point the Fed will start walking-back those tapering expectations. This sort of leads me to believe that Bernanke's intention all along was to relieve pressure in the bond and stock market, which had both arguably reached 'bubble' status. As the aforementioned NYT article states at the very beginning: "Wall Street never thought it would be this bad."

Deflation is indeed the worst nightmare of central banks, so removing accommodations in an environment devoid of the inflation that the Fed and other central banks have worked so hard — but unsuccessfully — to create seems counter-productive. Are they giving up, and acknowledging that they've lost control of rates? I seriously doubt that...

I'm inclined to agree with Rickards and others that all the taper hoopla is all that much hot air, designed to let some of the hot air out of the stock and bond bubbles.