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Cole's Market Insights - June 15, 1997

June 15, 1997

Economy Slows, Wholesale Prices Fall

Retail sales eased 0.1% in May -- the third consecutive decline. This is the first time retail sales have dropped for three consecutive months since the fall of 1981 -- shortly before a steep recession. Initial jobless claims are rising. Reflecting weakness in the energy sector, wholesale prices fell for the fifth consecutive month in May -- the first such string of declines in 45 years.

Several key economic reports will be released this week. The Consumer Price Index will be reported on Tuesday as will industrial production. The April merchandise trade deficit will be released Thursday.

Bonds and Blue Chip Stocks Surge

Emboldened by reports of slowing economic growth and declining wholesale prices, Wall Street's bulls continued to charge ahead at full throttle. The yield on the benchmark 30-year Treasury bond fell from 6.77% to 6.72%.

The Dow Jones Industrial Average recorded one of its best weeks' ever -- up 4.7% to 7782. The S & P 500 soared 4.1% to 893. Both of these indexes already are quite close to the writer's targets of 8000 and 900, respectively. Last week's rally was so powerful and the blue chip market so overbought that the final peak now is expected in July rather than late summer.

Small cap stocks lagged badly last week, with the Russell 2000 index advancing just 1.3% to 392 -- still well below the writer's 450 target. The small cap sector should start to outperform again very shortly as the search for "cheap" stocks intensifies and more money is put to work in the undervalued sectors of the market.

Gold Drops Further; Fed Study Advocates Central Bank Sales

But with the great bull market
expected to peak this summer,
anybody liquidating gold
investments at present exceedingly
low prices could be making the
investment mistake of their lives.


Gold dropped further last week as financial assets continued to soar. Nearby futures fell from $343.20 to $340.90. Gold stocks remained under pressure with the South Africans especially soft. Towards the end of the week, the market became aware of a new study by several Federal Reserve economists arguing that western nations should sell all their gold reserves. Interestingly, bullion fell only 50 cents on Friday after the study became public knowledge.

Despite the bullion market's relatively good showing Friday, the gold bear is not yet over. The noble metal's persistent failure to rally on good news -- the dollar's sharp drop against the yen and the strong up moves in platinum and palladium -- show a very weak technical situation. As knowledge of the Fed study grows among gold traders and investors, a drop below the important $340 support level would not be surprising. If the market comes to believe that heavy additional CB sales are inevitable -- by no means a foregone conclusion -- bullion could drop to $330 or lower before stabilizing.

Despite the prospect of additional near-term weakness, the writer remains convinced that the brutal gold bear market will end soon, no matter what the central banks do or don't do. The key is investment and monetary demand. This remains very low in the West. Western investment demand for gold will remain depressed until the global stock market bubble bursts for good. But with the great bull market expected to peak this summer, anybody liquidating gold investments at present exceedingly low prices could be making the investment mistake of their lives.

How cheap are gold stocks today relative to the market? Cheaper than they have ever been since U.S. citizens were granted the right to buy and sell gold in 1973. The XAU index of major North American gold producers would have to rise nearly 50% to reestablish the relationship to the Dow Industrials that prevailed at the beginning of the 1993 gold bull market. And the XAU would have to triple to reestablish the relationship that prevailed at the end of the 1993 bull market in gold shares.

The purity of gold is measured in carat weight.
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