I hope all is well. For those Americans out there I hope you had a festive Thanksgiving. I missed the opportunity to have a traditional turkey meal with friends and family but nonetheless had a great Malaysian meal while I was in Kuala Lumpur visiting clients. Overall it was a rather quiet news week – the only really notable event being the truce between Hamas and Israel. How long this will last is anybody’s guess but I’m sure this is not the last we’ll hear of the conflict….
Over to the markets, Wall Street experienced a nice bounce last week off its lows though not entirely convincingly so, as trade volume was rather light. If we see further strength in the markets this week it could mean we could experience a decent rally through to Christmas or what is traditionally known as the “Santa Claus Rally”. At this stage, it is difficult to tell whether the recent low marked the bottom of the correction or if another leg down will materialize after this bounce. If Wall Street manages to rally from here on heavy volume, that would be a good sign and confirm the beginning of the next uptrend. Conversely, if this rally fizzles out soon, lower prices will probably follow.
Turning to commodities, it is worth noting that both copper and crude oil are still trading below the 200-day moving average and this is in line with our expectation. Despite weakness in industrial commodities we still like the energy sector for investment allocation as it is a strong hedge against further tensions in the Middle East.
Gold Investments
Over in the precious metals patch, it is interesting to note that silver has already climbed above its 50-day moving average, whereas the price of gold is struggling below that level. In our view, the next uptrend in precious metals will be confirmed after gold takes out its most recent high which came in at US$1,739 per ounce. At present, gold is trading around US$1,732 per ounce, so it will not take much for the yellow metal to re-assert its uptrend. With the Obama reelection the investment case for gold is as strong as ever with several analysts predicting $2,000 gold in early 2013. We continue to recommend to Austen Morris Associates’ clients that at least 10% of their portfolios to be allocated to this sector.
In the currency market, the US Dollar Index has weakened somewhat but it is still trading above the 200-day moving average. As long as the US Dollar Index trades above the 80.21 level, the trend will remain up and other major currencies will continue to face selling pressure. Elsewhere, it is notable that the Japanese Yen has declined to a multi-week low and a decline below the March low will confirm the downtrend. For now, we continue to suggest exposure to the greenback.
Finally, over in the bond market, US Treasuries have sold off somewhat and high yield credit has rallied. Once again, this price action is consistent with the ongoing ‘risk on’ trade and the next bout of risk aversion should bring about the reversal. At this stage, it is difficult to know what will end this rally in risky assets, but an economic recession in the US will certainly do the trick. If the US was to slide into a recession next year, it is probable that US Treasury yields will decline to record lows. This asset is therefore an ideal instrument to hedge an investment portfolio. For our part, we currently have a modest exposure to US Treasuries in our portfolios and continue to recommend this approach to our clients.
Property and Currency 
As we keep mentioning in weekly Money Matters, there are presently a lot of unknowns in the financial markets and the best strategy to weather the markets at this time is to not be overexposed in any one particular asset class. Having a balanced exposure to bonds and equities (both developed and emerging) and a degree of precious metals and property if available, will allow you to smooth out returns over the long term.
For Austen Morris Associates’ investors – remember to hold a balanced portfolio and talk with your advisor about any repositioning to take advantage of markets at this time. For more updates on the world financial news please visit our Weekly Global Economic Outlook.
Wishing you all a great week!
Co-Head of Portfolio Management,
Bill Longstreet
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com
