GOLD AND BOND YIELDS RISE ON INFLATION EXPECTATIONS -- RETAIL HOLDERS ARE THREATENING THEIR 200-DAY AVERAGE

GOLD CONTINUES TO CLIMB... Gold jumped another $4 today to reach another 2005 high. Gold stocks are rising as well. Chart 1 shows the Gold ETF (GLD) reaching $454 today which puts it within striking distance of the high reached late last year. With bullion on the rise, gold stocks continue their strong performance. The Gold & Silver (XAU) Index is also trading at a new 2005 high and is heading toward its late-2004 peak near 110. The biggest stock in the XAU is Newmont Mining which is the strongest stock in the materials sector. NEM is headed toward its March high at 46.40 which will probably be exceeded. Heavy upside volume is another bullish sign. One of the factors driving gold higher is increased inflation expectations. That also explains today's big jump in bond yields.

Chart 1

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BOND YIELDS JUMP ON HINT OF PRICE INFLATION... The New York and Philadelphia branches of the Fed reported slower growth during September. What spooked bond bulls, however, was a huge jump in the prices paid index reported by the two Fed branches. That whiff of inflation pushed the 10-year T-Note yield to the highest level in a month (Chart 4). Higher prices combined with slower growth isn't a good combination for bonds or stocks. But it is good for gold and gold stocks. One of the recent signs of economic slowing has been seen in the weak performance by retailers which threatens to become more serious.

Chart 4

RETAIL HOLDERS THREATEN 200-DAY LINE ... I've written before about the weak performance by retail stocks and the negative message that sends for the economy and the stock market. Chart 5 shows the recent fall by the Retail Holders. The recent rally attempt failed at the (blue) 50-day moving average. The RTH is once again threatening is 200-day line. The RTH/S&P 500 ratio line peaked at the start of August and is still dropping. To the extent that retail stocks measure the willingness of consumers to spend, the poor performance by retailers is another negative warning that the recent market rally has been on weak footing.

Chart 5