Shrinking Jobs, Golden Opportunity

The jobs report issued Tuesday stated that the number of federal workers now is as low as the number was in 1966. 

In 1966, 4.3% of the workforce was employed by the federal government. Today that number is 2%. Today we have over 313,000,000 people. In 1966 we had 190,000,000. (Members of the armed forces are not included in this count for either year, by the way.) 

We bring this up because finally the chickens of the payroll tax hike as well as the federal spending and job cuts due to the "sequestration" agreement early this year, are coming home to roost.

The Fed is running as fast as it can, although some members of the FOMC are beginning to hint that the easing may have a secret 5th gear they can shift into. Who knows about 6th and 7th gear? Fiscal policy has largely worked in a direction opposite to that of monetary policy, forcing the Fed's hand time after time. Blame it on elected officials. 

Even before the shutdown, the federal government had undercut growth through its policies. When October's numbers come out - numbers that will include the effects of the shutdown - look for a further pull back in job growth. 

This is painting the Fed into a corner. If their mandate is to assist in the growth of employment and keep inflation down, what else can they possibly do but to keep the pedal to the metal?

Today, consequently, gold and silver are both up approximately 2%. 

The equities markets are up solidly in Europe and in the U.S., while crude is continuing to dip precipitately. Bond yields are also declining, good news for consumers and businesses alike. Only six weeks ago, the 10-year yields were pushing 3% but as we write, the yield is heading downward to the 2.5% mark. 

The chief weight on gold's back right now is the incredible decline of ETF's, which are sitll dumping hundreds and hundreds of tons of their holdings of the metal. Are they being reasonable? Are their erstwhile investors being reasonable? To gold bulls, those questions hold no real meaning. The answers are simply facts of life.

A bit more germane to the direction of gold prices is the question: "Can equities keep delivering?" The short answer is that some can and some can't. If consumer spending, employment and wage growth stay flat, how can the huge consumer slice (70%) of the economic pie grow? Of course there is no way the sector will grow without more employment and better wages.

We are beginning to hear some moderately negative news about 3rd quarter earnings. That may be the proverbial canary in the coal mine stopping its song.

Worse, we have been expanding since mid-2009, or roughly 4-1/2 years. A large percentage of the big-ticket replacement durables that ordinary families have bought - cars, washers, sump-pumps, refrigerators and so forth - will not be bought again for some time. The same goes for business and industry.

While there may be some room for equities growth, it will not be across the board and poor result will prompt job cuts, wage squeezes and worse, benefits cuts. 

A close glance at the history of uninterrupted equities bull markets tells you that around the 

25%-rise mark we're in for a serious correction, or even a crash.

While we don't like predictions based on the failure of other, and we find little or no glee in such reckonings, as cool-handed traders, we have to understand that such a scenario is good for gold. 

Wishing you as always good trading,