Friday's Jobs Report Disaster Is Splendid News For Gold
While the disastrous monthly jobs report reflects poorly on the U.S. economy, it is splendid news for gold. New job creation tanked in March, and that news plus the prior-month revision is causing a reevaluation of the economic situation altogether. The repercussions of this and how it affects gold may be complicated, though the immediate effect should be significantly positive.
The monthly Employment Situation Report is the most widely followed economic data point among investors. It shows monthly changes in the unemployment rate, and includes details about segments of employment and unemployment. It also shows the monthly change in net nonfarm payrolls or jobs, and breaks that out among segments, including private and public. This is critical, because it measures one of two of the Fed's mandated focal points, employment, and does so in a comprehensive manner. Given the Fed's influence, employment and inflation data weigh heavily for markets, including the market for gold.
The jobs report showed nonfarm payrolls increased by just 126K in March, versus economists' expectations for 247K. That is a significant shortfall, and it would have shaken markets, had they been open for trading on Friday. Not only was March job creation poor, but February's was revised lower to 264K from the initial reporting at 295K. This dramatic of a report will require investors to critically reassess the economic situation.
( Dollar Index Chart at Bloomberg)
Given the news, the Fed seems to have reason here to be patient for longer and to hold off on its interest rate plans until it sees employment shored up. The immediate effect to gold seems to be splendid, as the dollar indexdropped precipitously Friday, down 0.9%. Gold is priced in dollars in the U.S., and is impacted by important changes in the relative value of the dollar.
( Spot Gold Price at Kitco.com)
Spot gold has not had a chance to react yet, with markets closed; but when trading begins, gold should appreciate on the dollar decline and Fed implications. It's noteworthy, though, that dollar strength has been a block to near-term Fed action; if the dollar now weakens, as I've suggested it would for a few months now, and if this proves just a temporary blip for the economy, then the Fed's plans may end up playing out as I've expected, with September marking the first rate hike. Thus, in such a situation and over the coming months, gold's upside would be limited as we approach a Fed rate hike. I tend to give the market too much credit, though, so the most likely outcome here is that the dollar backtracks sharply and gold soars until the market again sees a Fed rate hike as relevant at some point in the future.
You can see the relevance of the dollar on gold over the past several years in this five-year chart of the SPDR Gold Trust ETF (GLD-NY). As a shift in Fed monetary policy has been anticipated, with the Fed moving from an expansionary stance to a tightening policy, gold has been giving way to dollar strengthening. Dollar strength has been greatly served by the easing actions of central banks in Japan and Europe as well. The dollar has strengthened significantly to this point, though, and appears to me to be fully accounting for the actions of the central banks. The chart of the GLD shows recent stabilization, which also underscores the importance of other factors in play for gold, including geopolitical. |
