Mixed Data Mixes Up Analysts and Traders As Gold Slips

Today, everyone from Wall Street to the City of London to Hong Kong was weighing reaction to the good but mixed U.S. data released last Friday.

After a rocky first quarter, the American economy rebounded with stronger job growth in April and prospects look good for May. However, is it enough, ask investors, to warrant an interest-rate hike by the Fed in June.

Here are some items to consider.

For roughly every 200,000 jobs created, the U.S. unemployment rate ticks down a tenth of one percent. Therefore, should May’s job growth show a similar gain to April’s that means the rate would dip to 5.3%. If.

Inflation has been very tepid for some years. It doesn’t really show much sign of life now, either.

It is an “open secret” that Chairwoman Janet Yellen and a few other members of the Federal Open Market Committee do not fully buy into 5% as an adequate target for unemployment. Ms. Yellen has hinted as much a number of times in both her distant past and more currently. And, as everyone knows, the official unemployment rate bears little relation to the real unemployment picture.

As labor gains go, so goes the rate of inflation. Until the U.S. has more dollars chasing fewer goods, inflation can’t budge much. And where do those dollars have to come from? In an economy that is 70% consumer driven, there is only one rational answer: the consumer. The more unemployed consumers there are, the fewer the dollars that are chasing goods.

This is not to say that some spectacular rise in spending by businesses or various levels of government can’t push the economy forward, and thus inflation, but that 70% consumer component figure is very imposing indeed.

We also saw dollar strength contribute today to a weakening of gold prices. The dollar has left the corrective phase it was caught in through the early months of 2015. That switch back to mildly bullish is likely to raise the price of the dollars against the currency basket it is measured by.

That will make for a significant headwind for gold. Gold, though, is facing other problems.

Physical demand has been soft for some time. General economic volatility, although it has risen lately, is still very lower versus fall and winter of 2014. The yield on U.S. 10-year bonds is just below the 2.25% mark and demand has stayed strong. When the Fed does raise interest rates, look for bond rates to rise as well and for gold to become less attractive.

Additionally, while U.S. equities have struggled through the earnings season look for them to have a spring rally that will be followed by the summer doldrums.

In brief, gold needs a reason to move to the upside. Short of a surprise visit from the Four Horsemen of the Apocalypse, we don’t see anything on the horizon that will stimulate such keen interest in investors for gold.

Wishing you as always, good trading,