Gold extended modestly higher in early U.S. trading, establishing new 6-week highs above to the 1270.68 high from last week. At this point there is little in the way of intervening resistance ahead of the high for the year at 1296.06.
More soft economic data continues to raise doubts about the Fed’s tightening cycle. Pretty much everyone concedes that a September rate hike is off the table. While a December hike continues to hover around a 50/50 proposition based on Fed funds futures, many are starting to talk about the central bank being done for this year.
Personal income was unchanged in June, well below expectations of +0.4%, versus a negative revised +0.3% in May. Personal consumption expenditures (PCE) rose just 0.1% in June, in line with expectations. The PCE chain price index — the Fed’s favored measure of inflation — was unchanged. The chain price index excluding food and energy edged up 0.1%.
If inflation remains elusive and below target, it makes little sense to tighten monetary policy, whether in September or December. That goes for the quantitative tightening (QT) associated with balance sheet normalization as well.
Despite the weak economic data and the rising level of political uncertainty in Washington, stocks continue to rally. When equities hit new highs on both good news and bad news, one should be worried and perhaps start taking some money off the table. We have featured a number of articles in recent weeks suggesting stocks have reached bubble territory.
Interestingly, former Fed chairman Alan Greenspan believes the bubble we really need to be worrying about is in the bond market. However, that spells trouble for stocks as well.
There is one asset that performed exceedingly well during the stagflation of the 1970s. The yellow metal began that decade at $35.08 and ended it at $512.00, a gain of 1,360%!
According to the Fed Model referenced by Greenspan, “If rates start rising quickly, investors would be advised to abandon stocks apace.” As for where to reallocate a portion of that capital, I think the choice is pretty obvious. In fact, it may worthwhile to start the reallocation process sooner, rather than later.