Hidden Strength

Gold has been mired in a range, or two sets of ranges recently. But, the strength the yellow metal is showing in the face of lowered world tensions and in the face of renewed risk appetite for equities is quite impressive.

What are the reasons behind both the range-bound nature of the market and gold's resilience? The two seem at odds with each other at first glance.

In a few words, it is the state of employment in the United States. "Slack" is the word most often used by economists and the insiders at the Fed. Chairwoman Janet Yellen, in fact, has used words to that effect from the moment she took her lofty position.

What does the consistent appearance of that assessment mean? Interest rates have to stay low for some time in order to persuade the so-called job creators to actual fulfill their role. $4 trillion in quantitative easing hasn't done the trick. Maybe a few more years of rock-bottom interest rates will.

In its July 30 policy statement The FOMC added new language emphasizing weakness beyond the main unemployment rate, stating that "a range of labor market indicators suggests that there remains significant underutilization of labor resources."

Even with employment rebounding, Yellen cautioned it is still too soon to start withdrawing accommodation. She testified to lawmakers July 15 that the recovery is incomplete, seeing "significant slack" in labor markets. She also said the unemployed and their families endure "psychological trauma."

The Fed is monitoring "not just the unemployment rate but a broad range of indicators including involuntarily part-time employment," she added.

Today, dollar strength abetted the fall in gold prices. The dollar was also responding to an easing of world tension. Oil fell to a 14-month low, which tells us that, despite all the tensions that have cropped up over the last two to three months, oil is not in short supply and/or demand is down.

Possibly even more importantly, natural gas, though up today, is about $1.00 off its highs reached in late May. Buy on the rumor, sell on the fact.

To return to our opening thoughts for a moment, though. While longer-term low federal interest rates are good for gold, they may serve only to keep a floor under the price. And we should also remember, that, unless the bull stock market falters, those same interest rates are also good for equities.

We're waiting for all this investment to create lots of jobs and better paying ones, and looking for that to generate a sudden spike in inflation. When? Stay tuned.

As always, wishing you good trading,