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

Fed to the “Fiscal Cliff” Rescue

Stocks continued to “melt up” in expectation of a resolution to the fiscal cliff earlier this week, but a dent in the ongoing bullish fantasy appeared on Friday when Boehner’s plan “B” was rejected by a majority of his own party. In its place, House Republicans passed The Spending Cuts Bill by a vote of 215-209. The bill annuls the automatic cuts of the fiscal cliff and voids the sweeping cuts to defense and other programs with cuts elsewhere in the budget. The House also approved by a 315-107 vote the 2013 National Defense Authorization Act, which grants $633 billion for defense spending – a not-small detail the Democrats will most likely reject.

Spending cuts and/or tax increases are the only viable solutions left to entertain, yet it’s clear neither side is willing to take the necessary step, given the already unstable U.S. economic situation.  That said, it’s likely that the proverbial “can” will be kicked down the road, perhaps for the last time, to save Congress from the political backlash that comes from making the tough decision. This leaves only one option for the timid souls on Capitol Hill – that being the Fed and its money printing machine – as usual.

12-21-12In the latest week, the Fed monetized some $41 billion in mortgage backed securities, the largest weekly addition to its balance sheet so far this year.  In the space of about three months, assets held by the Fed grew nearly 4% to $2.921 trillion, a modest $19 billion off its high set in February of this year – when, coincidentally, gold also lost its upward momentum.  So clear is the Fed’s mission to save what Congress can’t, it plans to increase these monthly purchases of fixed income to $85 billion a month, starting in January.  That’s a run rate of a little over $1 trillion per year, and it won’t be executed under the dynamics of an Operation Twist. It will consist of outright purchases instead – sums outmatched only by the newly appointed liberal democrat, the not-so-honest “Abe,” in Japan.  The Bank of Japan monetized over $1.2 trillion in securities in the latest year. Prime Minister Abe intends to exaggerate these efforts, with stated plans of “unlimited easing.”

This prompts a question: With dependency on QE growing ever greater as time passes, why do the metals seem determined to play the role of the red-headed stepchild in the marketplace?  It could be that traders and a few hedge funds have temporarily lost their senses, or it could be market manipulation by the powers that be, as some have reasonably claimed. Whatever the case, there is no visible bearish case for the metals.  As the gold price fell below its 200-day moving average this week, gold ETF assets under management (all known) steadily rose to a record high 84.637 million ounces in the same space of time.

It also could be that the recent, somewhat positive economic data may have had a negative impact on the metals.  However, no trader worth his salt would place any great degree of credence on information skewed by a storm. Nor would he trust GDP data skewed by an aggressive yet superficial assault by the Fed on mortgage backed securities. (That assault allows for mass refinancing, and thereby the augmenting of household incomes to even greater heights – an act becoming increasingly more inflationary as foreign creditor support wanes. Total net TIC flows for October were -$56.7 billion.)

Instead, we would argue that the recent confusion within the metals markets and in stocks (staying firm) has set them diametrically opposite one another, as they should be – setting the stage for an attack on the generalized fear of deflation longstanding within the metals market.

Best regards,

David Burgess
VP Investment Management