Global Market Commentary

November 03, 2016

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Market Summary

Buy Volatility and Buy Gold If You Are a Long-Term Investor

U.S. stocks are getting cheaper: is a short-term market bottom near?

The key event this week was the strong rise of volatility and of gold after political surprises near the U.S. election:  Wikileaks, FBI investigations, and tightening polls.  In our view, many have not considered the economic policy impact of a Trump victory, or of a Clinton victory coupled with a Democratic capture of the House of Representatives.  Higher taxes or lower taxes?  More simulative economic policy via government spending or by tax cuts?  As mentioned above, we have analyzed many possible scenarios that may be generated by different U.S. election results.

Even more important in our view is that UK inflation ticked up by 0.6% last month due to higher fuel prices brought on by a lower pound and a lapping of the year-earlier oil price decline.  This brings some measures of UK inflation to about 2% — and most of the lower pound’s effect on prices are not factored into the system yet.  We expect much higher inflation in the coming months in the UK (Apple [NASDAQ: AAPL] just raised prices in the UK by 20%), and more gold purchases by UK residents.

Clearly many countries are facing higher inflationary costs as their currencies fall and we must remember that gold buyers do not all reside in one or two countries.  Many gold buyers are found in the UK, Europe, Latin America, China, and other parts of the world where inflation is increasing as their currencies fall in U.S. dollar terms.

          U.S. Markets

Up until and through the election, if it is close, we expect high volatility — especially if the results are contested.  For those of you who like to hedge markets and buy volatility insurance, now is a good time to continue to hold or add to volatility insurance.  Gold is favored because of rising inflation numbers in many countries and due to technical breakout of gold mining shares.  Small-cap highly speculative shares, bigger widely followed gold shares, and gold bullion are all in demand, and will continue to be so for at least at least the next few months.  U.S. stocks are falling as a result of election angst.  It is important for us to remember that buying opportunities in stocks occur when uncertainty and panic are found in stocks.  The current uncertainty is setting the stage for a market rebound that could last for a month or two, and we are waiting for the correction to provide good prices to support stock market bargain hunting.

          Emerging Markets

In 2016, the best emerging markets have been Brazil, Chile, and Argentina.  We are now expecting a correction in their performance as their currencies fall versus the U.S. dollar.  All three currencies — the Brazilian real, Chilean peso and Argentine Peso — have risen nicely and may rise more, but not until they have corrected from the recent price rises.  These price rises will negatively impact their exports if they continue, and thus they will be reined in.  We favor Brazil and Chile but only after declines in their stock markets.

Chinese corporate profits are strong, but the stock market has not yet reached momentum mode for Chinese investors.  Before the current Chinese real estate bubble and liquidity bubble collapses, we expect money to find its way into the casino known as the Chinese stock market: we’re watching Chinese retail investor sentiment for a sign that participation will be productive.

Other Asian markets can do well; our favorite is India — buy only on market corrections.

          Commodities

Gold, silver, iron ore, copper, and coal have been rising on Chinese demand.  Agricultural grains are possibly building a base for a move now that the northern hemisphere harvests are drawing to a close.  Technically some commodities indicate that they will rise over the next few months as inflation rises from very low levels to the 2–3% level now seen in many countries.

Thanks for reading; we welcome your calls and questions.

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