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

Question for the BoJ: What Was That About Price Stability?

Overseas in Sunday night’s trade, the gold price was under significant pressure that caused regulators to halt trading several times as the selling seemed to feed on itself.  Reasons provided for the decline were vague at best, including sluggish demand to start the Indian wedding season and/or margin calls forced upon Japanese carry traders.  Regardless, there was no fundamental reason for the event, which serves as an indication of just how irrational and/or skittish gold investors have become following the Wall Street-induced theatrics one month earlier.  Anyway, that selloff took us back to within range of the lows previously established in April.  Short-sellers  viewed the “double bottom” as an opportunity to cover their positions, producing a sizeable short squeeze that saw gold recoup its overnight losses and manage to finish the day (Monday) with a healthy gain of 33 points (to $1393.80).  That rally kept gold out of bearish territory from a technical perspective – much to the chagrin of several analysts who have repeatedly called for $1,100 or lower.

By mid-week, the central bankers were back, chirping at the microphone again in classic “double speak” regarding QE and economic affairs.  With markets overheating in both the US and Japan, traders were half expecting a curtailment of QE to put stocks in check.  This did not happen, of course (precious metals investors were relieved).  Both banks reinforced their policies, providing multiple excuses to continue their current rate of printing – at least for now.  As an aside, Bernanke admitted that pulling QE would be “premature” and would likely “hurt” the US economy – a forgone conclusion at this stage.  In any case, gold at first relished the news, and spiked higher by about 40 points in short order.   Within that very hour (on Wednesday), the FOMC minutes were released. They recapped the Fed’s weighty discussion regarding the supposed need to taper off of QE – gradually over three to four months.  That news erased the Bernanke-induced 40-point gain in gold and also sent stocks into a bit of a tailspin, with the Dow losing a few percentage points in short order.

That fear of a QE shutdown spilled into Asian markets overnight on Wednesday.  The Japanese Nikkei 225 average (up 65% since last June), stole center stage, shedding a little over 1,140 points, or 7.3% – despite stops in force. That’s “price stability” for you.  More importantly, the yen rallied smartly against the US dollar, which provided the official support the metals needed to complete the week on a positive note.

That said, the rally in US and Japanese stocks may continue, as their foundering economies validate the use of QE in the near term, but one thing is certain at present.  Confidence in the Fed and the BoJ was shaken this week when markets revealed their dormant yet extreme vulnerabilities.  Hedging one’s bets against future shocks therefore becomes all the wiser.  Such shocks would require, either in whole or in part, a reversal of recent trends – referring specifically to the yen’s epic slide against the US dollar.  If this begins to change course as the BoJ’s grand experiment loses credibility, by default the dollar should undergo the scrutiny it has erroneously escaped thus far amid record QE here at home. In short, this is something we think gold bulls can come to appreciate in coming weeks, as the story is bound to intensify.

Best regards,

David Burgess
VP Investment Management