Upbeat Jobs Report Hammers Gold Prices

Initial market reactions to the announcement by the U.S. Department of Labor that 295,000 new jobs had been added in February were surprisingly downbeat. The reason is clear.

The number – which came in at 55,000 more jobs than predicted – has stoked fears about a rise in the Fed’s interest rates. (Not surprisingly, bond yields on the U.S. 10-year bond rose.) Equities were down; the entire precious metals complex was down; base metals except for nickel were down; Texas crude was down 2.6%, and, of course, the dollar went up more than 1.6%.

We said yesterday that a jobs number slightly lower than expected would hurt gold prices by confusing traders. However, we could not foresee the overreaction to the mere whiff of a Fed hike. Let’s pull the choir together and sing together: It’s coming! – But when?

There are a couple of conundrums facing the Feds. Within the rosy jobs-creation data are some disturbing trends. It seems as if labor-force participation simply is not reviving in any significant way. It is also apparent that wage pressures and therefore inflationary pressures are bleating like newborn lambs.

There is wage growth among the Millennial generation, but only because they were starting from a relatively low point. Wage growth is worst among middle-aged people and Baby Boomers. (The last, Boomers, seems understandable because they would already be making higher wages, so their baseline is tougher to move up.)

This creates some interesting puzzles for the Federal Reserve and its policy arm, the FOMC, as it tries to anticipate the optimum moment to raise interest rates.

Results on job creation and the unemployment rate were about as good as one might hope for. The unemployment rate has now touched the upper boundary of what Fed officials think that rate should be in longer term – 5.2 to 5.5 percent. However, historically, as we explained yesterday, significant wage pressure does not usually form until unemployment hits 5%.

On the other hand, lack of progress on wages and low momentum in returning people to the labor force give plenty of ammo to officials who feel there remains much slack in the labor market.

Some Fed members have said, in so many words, that it wouldn’t be all that bad for the economy to run “hot” for a while.

It is hard, naturally, to predict job growth and its effect on the unemployment rate. It’s even harder to predict exactly when wage pressure will build.

For the moment, gold bulls will have to wait for the hyper reaction to the threat of a Fed rate hike to simmer down. Whenever a rate hike comes, it won’t be pretty for gold.

As a side note, I will be presenting a live webinar next Wednesday (March 11) at 4:30 EST. Please use the link to our website below to register for this Free live event

Wishing you as always, good trading,