Cole's Weekly Market Insights

February 14, 1997

Economic Data Remain Friendly

Last week's economic data releases provided further evidence that U.S. economic growth remains modest while inflation still is subdued. Productivity in the non-agricultural economy rose at a 2.2% annual rate during 4Q 1996 after holding steady the previous three months. This was the best showing in three years and is especially impressive considering the advanced age of the ongoing economic expansion. Retail sales climbed a modest 0.6% in January and the December gain was downward revised to just 0.3% -- providing more evidence of a mediocre holiday season. Industrial production held steady last month after climbing 0.5% in December. The operating rate slipped from 83.5% to 83.3%. Finally, reflecting lower food and energy costs, producer prices for finished goods fell 0.3% in January. The core PPI, excluding food and energy, was unchanged.

On a more troublesome note for the financial markets, American workers' wage gains last year were the biggest since 1990 and higher than the rate of inflation. In a related development, "Business Week" magazine ran an article discussing the AFL-CIO's aggressive new organizing efforts under President John Sweeny.

Pointing out that unionized workers typically make 20% more in pay and benefits than their non-unionized colleagues, the article was skeptical that Labor would be able to reverse its long decline, but conceded this was a real possibility. In that event "the effect may be profound. Politics would become even more polarized. Society would look different if some church and social groups align with labor as they did back in the 1930s. Executives would face a weighty new challenge, and American workers would gain a louder voice than they've had for years."

Something for the bulls to think about!

Financial Markets: Dollar Firm, Bonds and Stocks Surge

Investors poured another
$24 billion into equity
funds during January.

The dollar remained strong despite the G-7 statement last weekend that the greenback has risen enough. After dropping briefly against the yen and the mark on Monday, the dollar rebounded reflecting the fact that underlying economic fundamentals continue to favor the greenback. Too, the G-7 statement said nothing about taking any action to halt the dollar's surge and was seen by many as just an attempt to talk the greenback down. With the market convinced that Germany and Japan cannot hike rates and the U.S. will not lower them, aggressive G-7 intervention in the FOREX market may be required to finally cap the dollar rally.

Buoyed by this strength in the greenback and the very favorable PPI report on Friday, bonds rallied sharply last week, with 30-year Treasury yields dropping from 6.70% to 6.53%. Stocks also jumped again. The widely followed Dow Jones Industrial Average surged 133 points to 6989 after moving briefly above 7000 on Thursday. Investors poured another $24 billion into equity funds during January.

Gold Finally Rallies, Silver Surges

But perhaps the most positive
omen for gold was the very
powerful jump last week in
the white metals -- silver,
platinum, and palladium.

Gold finally managed to stage a decent rally last week despite extraordinarily negative investor sentiment, the widely touted "death" of inflation, persistent strength in the dollar, and soaring stock and bond markets. April gold rose $4.10 to $348.10 per ounce -- the first weekly rise this year -- and most gold stocks rebounded nicely. The fact that gold stocks generally held up much better than gold during the vicious January sell-off provided an early signal that the decline would not be long lasting. The ability of gold to rally strongly last week in the face of a very negative news environment is a welcome development.

But perhaps the most positive omen for gold was the very powerful jump last week in the white metals -- silver, platinum, and palladium. These -- especially palladium -- often move ahead of gold, both up and down. March palladium rose $2.15 to $137.50 after having traded below $120 not long ago. April platinum soared $15.70 to $371.60, while April silver jumped 25.5 cents to $5.22.

It is too early to be sure that the yellow metal has finally troughed after its long bear market, but the signs now are more promising then at any time since gold peaked at $416 in February 1996. One thing for sure -- gold and gold stocks now are extraordinarily cheap relative to financial assets. With the G-7 seeking to halt the dollar's ascent (even though they have not yet been successful), the odds are bullion soon will no longer be facing massive headwinds from this source. Unless the European Central Banks decide to sell large portions of their holdings at firesale prices, the gold bear may finally be going into a lengthy hibernation.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.

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