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

Hype Triumphs Again for Today

Japan’s Nikkei 225 average kicked into overdrive last night, rallying over 3% to close at a new high for the year. There was nothing we could see that caused this spike except that much was made about the yen dropping through a “psychological barrier” of 101 against the dollar. Neither Mr. Abe nor Mr. Kuroda, though outspoken on a range of subjects this week, mentioned anything about extending or increasing the Bank of Japan’s commitment to “QE.” We would therefore conclude that volatility in Japanese currency and stock markets was entirely speculative in nature (a sizeable short squeeze was perhaps in effect). When our markets opened this morning, the dollar was up a little over 0.5%. This had the metals under some pressure in the early going. Nevertheless, they managed to rally at days end – gold finishing with only a minor loss, and silver with a small gain.

5-10-13 Box ScoresStocks remained firm all week, while Treasuries gave up some of their recently acquired gains – they lost about 16 basis points on the 10-year Treasury by week’s end. Most of this market action, at home and abroad, could be classified as noise, in our opinion. Nothing fundamental drove prices this week, though Bill Gross was on record today calling an end to the 30-year bull market in bonds.

As we mentioned last week, the dollar continues to be our focus. Despite having rallied back into technically “safe” territory this week, we remain dubious about its future prospects. The dollar obviously saw some strength following a series of rate cuts by central banks, including the ECB, India, South Korea, Poland, Vietnam, Australia, and New Zealand (which actually monetized). Thailand, Taiwan, The Philippines, and Switzerland are just a few of the other banks standing ready to do the same, “if need be,” in the coming weeks. Yet rate cuts in general are not the same thing as monetizing over $1 trillion, as both the Fed and the Bank of Japan will do this year. Rate cuts can and do create financial distortions, but money printing is like a double shot of espresso in terms of its inflationary impact. Therefore, we would expect to see the dollar and the yen come under continued, and perhaps this time uninterrupted, pressure in coming weeks.

What can be said about the metals, given what currently seems to be a persistent undertow? We submit that support at present levels exists, despite the swath short sellers recently cut through the market; the pervasive, though mistaken, notion that the economy is on the mend; etc. The metals are simply not going down well. Physical demand remains strong both here and abroad. China’s gold consumption increased 26% year-over-year in the first quarter (223.5 metric tons imported from Hong Kong in March alone). And the US mint recently sold the most coins in its history, delivering a record $311 million (6.5 metric tons) worth of gold and silver in the month of April. That said, what remains unseen is a pop in metals prices in the futures markets, where the influence on prices is significant in the short run. We’ve seen this happen for oil and other commodities. It would therefore not be terribly surprising to see it happen for the metals sometime soon.

Best regards,

David Burgess
VP Investment Management