Data released today that showed U.S. sales of new homes fell 13.4% in July to their lowest level since October. The statistics sent gold and silver streaking toward the stratosphere today (Friday). Gold is up at 4 PM New York time by 1.5% while silver has rocketed up 3.5%.

"Obviously housing is a key driver for the economy and perhaps that will keep the Fed holding the line a little bit longer," said Matt Zeman, a senior market strategist with Kingsview Financial.

Zeman is so right, but it is certainly impressive that not only the analyst community but many members of the Fed have been strutting about saying the American economy is really getting back on its feet. Truth: Bad housing reports = bad jobs outlook. Housing has been helping add some jobs, but nowhere near the 3 to 3.5 million Congress and the President have been hoping for. 

The fact is that banks, which have welcomed Federal Reserve largesse, are simply not lending enough money. In all fairness, the corollary to this is that there are not many people left in the good risk pool to whom money can be lent for houses, cars, boats, and other large ticket items.

"The new home sales number is terrible, so the fear is clearly that higher interest rates (are) going to topple this housing recovery, which means the Fed has to ease and not tighten," said Axel Merk, portfolio manager of Merk Funds which has around $500 million in currency mutual-fund assets. 

In general, the housing recovery has been spotty, a patchwork around the country, differing from region to region, almost town to town. While an indicator such as housing prices, (which have been growing at a tepid pace or declining) does not factor directly into the inflation rate (because not everyone owns a house or is trying to buy one), there is a rub-off effect. The more new houses built, the more the materials and labor used in them costs, driving prices up. Today's July scenario presents the opposite outcome, and will only serve to keep inflation tame as a kitten.

This in turn invites us to double down on our position that the Fed will not begin tapering at the next FOMC meeting in September. More securities purchases along with the rock-bottom prime rate of 0.25% eventually will result in inflation. In the meantime, the promise of QE3 continuing at the current rate and the whiff of burning inflation is enough to keep precious metals moving higher.