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The Fickle Winds Of Data

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It's always amusing to watch a fundamentals overreaction corrected by an equal and opposite overreaction. It leaves you wondering where the truth is in trading impulses.

Our thought is that traders do not understand the synergy between "jobs created," "the unemployment rate," and "potential Federal reserve actions."

After all, the mindless trader says, 209,000 jobs is a whole lot of shakin' jobs. (Yes, that's true.) The Fed will have to raise rates now! (A cold bucket of water on the trader - Pay attention!) Oh... I see, says the same foolish trader a day after... the unemployment rate actually went up. How did I miss that?

The Fed is shooting at 5.2% unemployment. The U.S. is one full percentage point away from that. Every time the monthly meter shows around 225,000 jobs, the rate goes down. Every time it adds 200,000 jobs or less, the unemployment rate goes up. Seems fairly easy to comprehend.

And, the Fed once again cited poor wage growth. In fact, in the last handful of FOMC meeting minutes, they've been downright harping on that. As we say ad nauseam at The Gold Forecast, before you have inflation significantly higher than 2%, you won't have a booming economy for all stakeholders. (Although equities may continue to rise.)

To get to that 2.5 to 3.2% inflation rate, you have to have full employment and more demand for labor, which drives up consumer spending. That creates inflation.

While we are scarcely Marxist, we understand that as more spending power goes into the hands of fewer and fewer people, the inflation rate is stymied on that front. The family that has, say, $2 million per year in income and $15 million in assets, doesn't buy appreciably more consumer goods than the family with $80,000. After all, how many cars can a family buy? How many houses? How many washers, dryers, spark plugs, hats, shoes, etc.?

Throw into the mix the retirement of 10,000 Baby Boomers per day, who already are spending less as they are long past their large-scale acquisitive years, and the formula for inflation seems more and more depressive. (Ask europe and Japan.)

Now, the upside for precious metals bulls concerning Baby Boomers is this: it will drag more Millennials into the workforce and it will drive up wages. Fewer workers mean you have to pay more for workers who (sort of) want to work.

Consider this, too. Construction spending declined 1.8% in July, the biggest downturn in more than three years, the Commerce Department reported today. But where is the majority of this drop? In state and local (but not federal) construction spending. And what sector has pretty much the worst unemployment? Construction. This is a direct result of the inability of Congress to come together on infrastructure projects, highway building.

This is what the Fed means when it inserts language into its statements about fiscal policy constraints. We're missing a million construction jobs. Look under the Capitol dome and you'll see them there.

Getting loud and proud, however, is manufacturing. The monthly index was up dramatically more than predicted, and possibly more importantly, the New Orders Index took a big leap forward. Manufacturing jobs are very often well-paid positions, given the advancement in the sector of computers/robotics.

The problem for the jobs measurement, though, is that while we are making more and more products, it takes fewer and fewer people. (Think of changes in agriculture between 1900 and today. Mechanization changed a country where 40% of the workforce worked on the farm to a country where less than 2% now do, yet yields have expanded impressively.)

What does this mean for gold and silver?

As long as investors and traders keep their eyes on the ball - meaning that they fully comprehend the most probable timetable for a minor interest rate increase - our precious metals should see another strong rise in the short and middle term.

As always, wishing you good trading,

Gary S. Wagner - Executive Producer