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

Gold Bears Trading for Dimes, Not Dollars

In overnight trade Tuesday, gold was suspiciously soft in front of Wednesday’s release of US retail sales data (1,500 contracts were dumped in London trade). Shortly following the open in New York, the sales data indicated a 0.4% increase for the month of October. Thrilled by the news, stocks spiked and gold fell further. It didn’t stop there. Later that day, the Fed minutes and remarks made by Fed governor Bullard revealed that tapering remained a viable consideration in the near term, while the ECB jawboned about another rate cut (in the mini-deposit rate).

11-25-1311-25-1311-25-13boxThe combined effects of those events had the dollar rising along with stocks, and gold trading through significant technical support levels of 1,250, closing the week at 1,243. Other metal related assets – the miners, silver, platinum, and palladium – all traded down in sympathy, but did not suffer to the same extent as gold. Downside volumes for gold, whether in the futures pits or in the ETFs, were a fraction of those seen in earlier selloffs in April and June – and that’s the good news, as selling pressure is clearing abating.

That did not stop us from taking a bit off the table in terms of our gold exposure at MWM. Even as the fundamentals are screaming for a greater upside in the metals, and as record money printing persists, gold has demonstrated a vulnerability to events and subsequent hostile trade. Further, gold can still suffer from the prevailing psychology and coinciding technical points of interest now that 1,250 has been broken. Therefore, a visit to 1,200 or slightly below in gold could be possible.

This is despite the fact that the economic data stands a good chance of worsening as we move into the holiday shopping season. Brick-and-mortar retailers Walmart, Best Buy, and JC Penny have all issued warnings that sales would fall short of previous year results. Also, interest-rate-sensitive areas of the market such as housing and autos are beginning to lead the market lower (the US retail sales for October actually showed a 1.9% decline in building materials).

That considered, stocks in our opinion have much more to worry about than the precious metals. Now at record levels, stocks are overvalued, and are operating on borrowed time and money (record levels of margin debt). At a P/E of nearly 20 for the S&P, there may have been only a few times in history where stocks were more expensive. Of course, that could be misleading since we also haven’t been this leveraged as a country at any other time – and leverage works both ways.

Box scores will publish Monday as we are traveling this week. There will be no comments next week in observance of Thanksgiving. So, from our family to yours – we have much to be thankful for. Have a blessed holiday.

Best regards,

David Burgess
VP Investment Management