Fed Fears Bring Down Gold
Like everyone else, we were surprised by the relative strength of the October US jobs report released last Friday. None of the employment sub-indices in other recent economic reports hinted at a better number. The market response was swift: surely the Fed will raise rates in December, so the dollar went up, commodities fell and the gold price took another hit. We had predicted a gold price correction two weeks ago but yesterday's drop made for a deeper correction than we had expected.
Fed Fears Bring Down Gold
Like everyone else, we were surprised by the relative strength of the October US jobs report released last Friday. None of the employment sub-indices in other recent economic reports hinted at a better number. The market response was swift: surely the Fed will raise rates in December, so the dollar went up, commodities fell and the gold price took another hit. We had predicted a gold price correction two weeks ago but yesterday's drop made for a deeper correction than we had expected.
First, a few words about the report itself. The headline: 271,000 jobs were added for the month, well above not only consensus but also the range of estimates. Does this indicate that the much anticipated economic acceleration is at hand? Not at all. The reports for last May and January of this year showed similar outsized gains, but were followed by disappointing news in subsequent months. Overall, job growth to date in 2015 trails 2014 by a significant margin; in 2015, the monthly average so far is 191,000 jobs compared to 260,000 for all of 2014, a reduction of 26.5%. Evidence of an economic slow-down, not an accelerated recovery.
Under the hood, the October report was actually somewhat depressing. Nearly 54% of the new jobs were part-time. And people over 54 years of age took nearly all the gains, accounting for 378,000 new hires. The key 25 to 54 age group, the people the economy relies on to have careers, earn higher incomes, raise families and buy a home, lost 35,000 jobs, with males in this age group dropping by 119,000 jobs. Older people who cannot afford to retire, whose savings yield nothing, are returning to the labor force or taking a second job, often for low wages. Is that the stuff of an accelerated economic recovery? Or is this?
Seasonally Adjusted Establishment Survey Jobs Added in Thousands: No Acceleration Here
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Source: BLS http://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth
We do not think the economy is as strong as the Fed says it is. An objective reading of the data tells us that. The fact that markets seize on a single positive job report after two bad ones indicates to us just how desperate people are to get good news.
But perhaps the markets are right about the Fed raising rates in December? We have to concede that a small hike is possible just so the Fed can save face after having painted itself in a corner. Probably such a hike would be accompanied by a dovish announcement of a pause (the one and done scenario) so as not to frighten the stock market. It looks like this may already be priced into the gold market. It should also be noted that, historically, gold negatively anticipates Fed rate hikes and rises once they begin...a classic case of sell the rumor and buy the news, as these charts shows:
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