Why Dodgy US Jobs Data is Keeping Gold Prices Down

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The US unemployment rate is one of the key factors that affects the price of gold. That’s because markets use jobs data as a sign of economic health.

Unemployment indirectly affects gold because it changes how the US Federal Reserve assesses interest rate levels. Higher interest rates result in a stronger dollar, which pushes gold prices down — lower rates have the opposite effect.

In this particular instance the jobs data suggests the Fed could hold off on raising interest rates. That’s down to new jobs figures showing better than expected employment rates. The data showed that 223,000 new jobs were created in April.

The more people employed, the less incentive they have to raise rates in the short term. That’s why the Fed will put off raising rates until later this year at the least.

If interest rates rise, then the price of gold could fall below US$1,100 — or lower — depending on how aggressive the Fed become. The further the rates go up, the more gold prices will suffer.

But if interest rates stay on hold, then gold could rise higher in the coming months. That’s because low interest rates send investors flocking out of cash and into hard assets like gold.

But investors are harder to convince when the data is misleading. The official US inflation rate is close to 0%. The unofficial data (see below) suggests it’s closer to 4%. If investors used unofficial inflation rates to measure against other assets, the price of gold would be much higher today than it is. The close to 0% inflation rate only makes the US dollar look safer than it really is.

 

consumer inflation official vs shadow statsSource: ShadowStats

How the Fed uses employment statistics to suppress the dollar

The unemployment figures present something of a miracle for the US economy. The current unemployment rate of 5.4% in the US is at a seven year low. To put that in perspective, Australia’s unemployment rate is 6.1%.

In an even bigger boon, wages actually grew by 2.2% in April. And low unemployment is only likely to continue pushing up wages.

As always we should remain sceptical of what kinds of jobs are being created. The new figures don’t suggest how many of these are full time positions. If recent history of official figures is anything to go by, many are part time or casual positions.

But the Fed doesn’t care about that. They’re just happy to point to encouraging data showing the economy is on an upswing. That gives them an excuse to keep rates on hold, and prevent the US dollar from appreciating.  And they know that raising interest rates will only lower the amount of money banks lend to borrowers. Since that’s the only thing keeping consumer confidence high, they’ll be keen to avoid that. That’s why the low unemployment rate will be used as evidence to prevent the dollar from rising.

How long will the US dollar’s strength last?

If the US dollar retains its current strength, then the gold price won’t move higher in the short term. There’s no reason for a mass market movement into hard assets like gold if the US dollar is strong and the official inflation rate is low. Investors are looking to see whether the US dollar will decline before they start buying gold in greater quantities. The question going forward is; how strong can the dollar remain?

The answer for gold investors is probably not the one they want to hear. The truth is that the market expects the Fed to eventually start lifting rates. When it does, the US dollar will appreciate in value.

That’s only going to put pressure on gold prices. Some economists predicted the Fed would cut interest rates as early as June. That was always going to be optimistic. Jobs figures (however misleading) might look good on paper, but the rest of the economy has issues.

There’s just not enough data supporting an interest rates rise soon. The US trade of balance for the first quarter was US$128 billion. In March alone the trade deficit was US$51 billion. That’s the highest deficit since 2008.

The US has been running a trade deficit for half a century. But a rising dollar is only going send the deficit into overdrive. The US government will be keen to avoid that, especially in the lead up to an election.

If you’re investing in gold however, the mixed economic data suggests that interest rates won’t be hiked anytime soon. The Fed’s likeliest time frame for rate hikes is probably late 2016.

On the one hand, it’s good news because at least gold will maintain its current level. On the other hand it’s less positive if you’re waiting for gold to jump sharply through a weaker US dollar.

Mat Spasic,
Contributor, The Daily Reckoning

 PS: Just like gold, the share market benefits from low interest rates. Both the US and Australian stock markets are continuing to push higher in 2015. Some say we’re already in the bubble of all bubbles.

The Daily Reckoning’s Vern Gowdie believes we’re going to see a catastrophic crash in stocks. The ASX could lose as much as 90% of its value.

That’s why Vern’s written, ‘Five Fatal Stocks You Must Sell Now’. In this free report he identifies the five blue chip companies which could destroy your wealth. And you almost certainly own one of them.

Vern wants to help you avoid the coming wealth destruction. His report will show you why these five stocks will the first to damage your wealth. To find out how to download the report, click here.

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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Joe Tabone
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Matt, correct me if I am mistaken, but I think you may have your logic back to front. You state that “the more people employed, the less incentive they have to raise rates in the short term”. I would have thought that if the employment market picked up even further, then a rate hike is more likely based on the overall improving strength of the US economy. You also state “some economists predicted the Fed would cut interest rates as early as June. That was always going to be optimistic. Jobs figures (however misleading) might look good on paper, but… Read more »
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