The Mind Of Yellen

Let's go directly to what the Chairwoman of the Fed said:

"More jobs have now been created in the recovery than were lost in the downturn, with payroll employment in May of this year finally exceeding the previous peak in January 2008. Job gains in 2014 have averaged 230,000 a month, up from the 190,000 a month pace during the preceding two years. The unemployment rate, at 6.2 percent in July, has declined nearly 4 percentage points from its late 2009 peak. Over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover...

"A key challenge is to assess just how far the economy now stands from the attainment of its maximum employment goal. Judgments concerning the size of that gap are complicated by ongoing shifts in the structure of the labor market and the possibility that the severe recession caused persistent changes in the labor market's functioning."

Yellen also went on to describe a phenomenon called "pent-up wage deflation."

That sounds rather esoteric, but in a nutshell it means that even during the recession, employers were extremely reluctant to forego giving raises or forcing wage cuts on workers who remained in their employ. In the here and now that means that those people who benefited already received their higher wages even though the businesses that employed them didn't have the margins to give raises. Now employers are holding their purse strings tighter. The result is that wage growth is stalled because of this mechanism used by employers to retain workers in hard times.

What does all this mean for gold?

It means that we are not ready for an interest rate hike anytime soon. It means that inflation is going to remain soft. (Because consumer demand is still spongy.)

In our minds we can see certain energies beginning to converge, though. We can see normal cyclical upturns in both labor participation and labor costs. We can see consumer demand rising as that happens. And we can surely see the Fed reacting to these bursting seams with a few stitches of rate hikes.

Of course the question everyone would like to have answered is: When? Another, more narrow-focus question is: Once cyclical labor problems are normalized, will the Fed attack structural labor issues or will it back away with a tacit message to Congress? (YOU handle this one.)

One aspect of the labor market that should be focused on is the acceleration of retirement by Baby Boomers. Many postponed their retirements (for many reasons too numerous to go into here). That constraint is being loosened as their retirement funds are rebuilt, and they feel that their children are setting off into a world of better job prospects. Just as a point of reference, the last baby Boomer to turn 50 will do so on December 31st of this year.

The pig in the python is moving through. And, as counterintuitive as this sounds at the moment, this movement will create a labor shortage in the next five to seven years.

Gold is reacting with uncertainty to these myriad events. Many gold bulls feel the metal is undervalued. Many long-time gold watchers also feel that gold has been marginalized as a safe haven somewhat via other financial instruments. (Bonds, currencies, and mortgage securities backed by - who else? - the Fed.)

But, as we have seen in recent months, there is nothing like gold as a haven during international turmoil.

Another drag that will eventually be removed is the slack demand in China and India. Their cases are very different but the result is the same. Physical demand has tanked by more than 15% in Asia this year.

Keep a very close eye on the Chinese economy. The pullback from gold buying there is due to a soft economy, regardless of what official numbers tell us. This is reflected in the declining importation of other commodities. The Chinese would have us believe that their manufactured exports are rising precipitously faster than their raw materials imports.

India is, as we know, another story. Their import duty has not only cut into the price of gold worldwide, but has created a new criminal entrepreneur class in the world's second largest country by population.

In late afternoon trading in New York, gold is up $4.50.

As always, wishing you good trading,