Gold Markets Could Be Supported by Trends in Labor Markets

Last week, all eyes were on the latest round of employment figures out of the US.  These reports have been made more important by the fact that the Federal Reserve has implemented its second reduction in its quantitative easing programs and most of the market is now looking to assess whether or not this was the correct move for the broader economy.  There are strong arguments that can be made on both sides.  But if we see any inconsistencies between the Fed’s bias and the real economic data, traders should expect to see renewed market activity and ramped-up volatility in all of the major asset classes. 

Precious metals markets, of course, will be some of the areas that see most of the buying and selling activity if inconsistencies become apparent.  “The latest news-driven reaction came as the monthly Non Farm Payrolls in the US disappointed market expectations and showed an increase of only 113,000 new hires for the month,” said Sam Kikla, markets analyst at BestCredit.  “This was well below the 180,000 jobs number that was previously anticipated by the analyst consensus.” 

Unemployment Falls Closer to Fed Target

On the positive side, we did see the unemployment rate drop to 6.6%, which is the lowest level since October of 2008.  This is the time frame that marks the beginning of the financial crisis, so these levels are significant.  But they are also significant because the Fed has previously stated that the US economy will continue to need monetary stimulus until the national jobless rate falls to 6.5%.  Whether or not they will truly commit to this “line in the sand” in another story.  But, at the very least, we can see that the Fed’s initial boundary could be reached very soon -- and this will create significant implications for the broader stimulus picture. 

Potential Divergences

It should also be remembered, however, that we are seeing something of a divergence between the monthly number of jobs created and the falling unemployment rate.  Last month, the US economy added only 75,000 jobs -- roughly half of what the country needs to keep pace with population increases.  This shows that we might be seeing a reversal in the longer term trends, as monthly Non Farm Payrolls numbers were particularly strong into the end of last year.  There is always the possibility that a declining unemployment rate could be driven by reductions in participation (more people have dropped out of the workforce).  If this is the case, it means there are many more negatives than positives when looking at the US employment figures.  This also means that the economy might not be on the strong footing that the Fed had previously expected.

Activity in Gold

These are potentially significant developments, so it is important to watch the market’s general reaction once these types of releases are made public.  After the data, gold markets posted their biggest weekly gains in four weeks, as the initial reaction from traders was to sell the US Dollar.  Gold is priced in Dollars, so the two assets have an inversely correlated relationship -- when one rises, the other usually falls.  Gold also tends to benefit from weak economic data, as investors start to look for an alternative store of value and move away from stocks. 

From a technical perspective, we are still trading below the all-important technical resistance level that can be found at 1270.  Gold has rallied almost two-percent this week, but the real question is whether or not commodities traders are bullish enough to force prices through this closely-watched resistance level.  This move could come next week.  If this does occur, it will signal a significant medium-term sentiment shift in gold.  The asset is still struggling to stabilize after last year’s losses.  The broader trend remains positive, with gold gaining 70% between 2008 and 2011.  For the remainder of this month, the real obstacle for gold prices is the 1270 level.  If this goes, a medium term bottom is in place.