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

Gold Traders Turn Bullish

At last glance, the metals were seen gaining momentum into the close Friday on the back of what appeared to be a fair bit of short covering. As readers know, Shinzo Abe’s politically motivated yen debasement scheme has had the dollar moving noticeably higher against most major currencies – including the precious metals. Last night, though, Europe’s uptick in GDP and Greece’s supposed emergence from recession had the euro, the Swedish krona, and the Swiss franc all in rally mode, which eclipsed any effect a collapsing yen had on the dollar. From a technical perspective, almost every currency within the dollar index had been ripening for a reversal, each touching upon or drawing closer to its support/resistance level against the greenback. Given that reversals in currencies tend to last a while, this latest move in gold may have some legs.

US retail sales were up only 0.3% for October, even as gas prices dropped substantially. Walmart reported a decent gain in sales for its third quarter, though early holiday discounting put a drag on profits. And Fed governor Dudley voiced the opinion that the Fed shouldn’t raise rates too quickly. This and a few other odds and ends had stocks grinding higher and bonds a bit lower for the week. I am still amazed at the bravado or speculation ongoing in equity markets. Almost everything is still perceived as bullish, even though Fed QE remains absent and will likely stay that way until an accident befalls the markets. It’s all one great contradiction.

On the topic of QE and its effectiveness, I think China’s recent troubles are worth mentioning. After a series of attempts to spur lending growth and a few monetary injections, China’s economy has continued to experience a series of downshifts. The most recent was seen in retail sales, industrial production, and aggregate lending itself. Keep in mind that if China is producing at a slower rate, it follows that consuming nations such as the US are also slowing. In any case, policies have thresholds, which is unfortunately a concept US investors have been blinded to, thanks to the short-term benefits of excessive leverage.

One last word on the subject of gold: Goldman Sachs apparently issued a buy recommendation on the Market Vectors Gold Miners ETF (Ticker: GDX). This was after gold’s recent drop had occurred, and helps explain why GDX’s upside volume has been rather bulky recently. The fund has now retraced nearly 61.8% of its recent decline, which began in late October this year. Analysts at Goldman are of the opinion that the worst has been seen for the miners. Whether they are right in that conclusion remains to be seen, though we tend to agree with them. At any rate, the additional support for the group comes at a most critical time.

Best Regards,

David Burgess
VP Investment Management