Official, core inflation continues to look rosy and supportive of stocks. Last week we asked the question, “When will the Fed acknowledge that non-core items, food and energy, are definite contributors to inflation?” The answer matters, because such an acknowledgement could be the trigger that sends the market into a trading range.

Right now, the Fed is getting off easy because they only pay heed to core inflation. And core inflation has been well behaved. However, if you add in food and energy, total inflation is running at around 5.5%, which is disturbingly high and certainly takes all the appeal out of buying bonds.

For that reason, we expect the small current rally in bonds will be over soon and that bond prices will be heading lower. We are not chasing this bond rally, and we will not be buying bonds anytime soon.

Instead, at the risk of sounding contrarian, we expect to see a big move upwards in gold prices in the coming months. Summer is usually the weakest period for gold, the time when bottoms are made. So we aren’t concerned about the metal’s limp performance lately. Keep in mind that when gold does make its big moves they tend to be dramatic, giving handsome rewards to those who bought low.Read more...