Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Chinks Appear in the Bullish Armor

Starting Monday, Japan announced that its GDP growth was subpar compared to expectations (up 0.6% from Q1). This led to a weaker yen, higher Nikkei 225, and stronger US dollar on the premise Abe and Kuroda would ease further. But these developments didn’t stop gold (in USD terms) from making a breakout move above its 50-day moving average, nor did it stop US stocks from selling off, as each respectively seemed foreordained to do from a technical perspective.

Tuesday, US retail sales for July (up 0.2% vs. 0.4% in June) were released. Autos were a substantial drag on the statistic, but were offset by an increase in gas prices. The mainstream media did a fair amount of cheerleading for the results, regardless of how underwhelming they were. Trading that morning was dominated by resurgent rumors of Fed tapering once again, which knocked gold down 18 points in the early going. Later that day, Fed-head Lockhart back-peddled on his pro-tapering remarks. His about-face on that subject put a bid back into stocks and a floor under gold late Tuesday, helping equities finish in the black for the day. From that point on, however, the price action progressively worsened for stocks and improved for the metals.

MWM, 13, 8-16, Box ScoresBy Thursday, Cisco Systems announced that it will be laying off 4,000 people. Walmart reduced profit expectations, citing lower consumer incomes driving lower sales. Cisco’s longstanding ailments might be old news to most investors, but news pertaining to Walmart must have come as a surprise to Wall-Street traders. Stocks sold off without much of any reprieve that day, shedding 200+ points on the Dow. As for the jobless claims report having anything to do with the decline, this we doubt. Claims fell by 13,000 to 320,000, a negligible improvement and one the Fed would likely ignore.

The precious metals brushed aside the dollar’s indecisive movement this week, rallying to new interim highs and breaking a few technical milestones (1370 for gold) along the way. Gold saw a fair bit of short covering, as did the miners. We’re certain a few natural buyers were in for the ride as well – emboldened by a report that consumer demand (for gold) worldwide had increased by 53% quarter-over-quarter. Demand rose 38% (to 44.5 metric tons) in the US, 36% (to 9 tonnes) in Japan, and 85% in the Greater China area (to 294.6 tonnes). It might be important to note that both Turkey and Egypt saw a fair bit of buying, as well, perhaps in anticipation of the heightened unrest there today.

It’s becoming clearer that stocks are discounting future economic weakness. The interesting thing about that, however, is that weakness of any kind is generally met with optimistic expectations for additional QE and subsequently higher stock prices. The upshot is that we may be entering a phase where bad news is treated as bad news, and money printing fades in terms of its effectiveness – which is an ominous proposition for stocks, to say the least. As for the precious metals, higher prices may be in order, even though the miners saw some profit taking on Friday (following a week of solid gains, +12% avg.). If the US dollar breaks below 80.5, for which it is poised, gold may receive the needed validation to proceed higher to the 1480 level.

Best regards,

David Burgess
VP Investment Management