Back To The Future
The heading of today's letter really means "back to misinterpretation" of what is the relationship among the ideas of 1) jobs created in a given month, 2) growth of an economy, and 3) the unemployment rate. Those three things then have to be matched against the soothsaying concerning what the Fed might or might not do.
The markets have spoken today. We're not exactly sure what the equities people are saying, but it's clear what precious traders are saying. They are saying they believe the 195,000 jobs created in June are enough to encourage the Fed to begin tapering QE3 actions sooner rather than later.
We're not sure why they are so sure. The unemployment rate staid stubbornly at 7.6%, no closer to the 7% level the Fed said would trigger the beginning of tapering. It should also be kept in mind that if only 20,000 fewer jobs had been added, the unemployment rate would have gone up to 7.7%. A thin thread indeed on which to dangle one's hopes for tapering.
Strength in the dollar is accounting for almost 30% of the fall in gold and not quite 25% of the loss in silver.
The dollar strength is running independent of the U.S. labor news, reflecting more the weakness in Europe, the uncertainty surrounding the finances of Portugal, Greece and now Italy. There is also concern that the EU will keep rates at or below their current levels. There is even talk of the ECB putting the rate into the negative. ("Please! Take our money.)
It is difficult to imagine a rationale that maintains that an economy, the American one in this case, is becoming more robust when unemployment will not budge. The problem that the monetarists have handed us is in the nature of a self-fulfilling prophecy. They have, in the last few years, propped up financial institutions that were too big to fail. They have pumped money into those same institutions that then lend it to investors who bid up stock prices. They have acquiesced in the big banks' drive to raise mortgage rates (while their bacon is being rescued from the fire by QE3).
It is time to begin asking and answering a difficult question: what will actually happen when the Fed does start tapering. (Of course if tapering means going from $85 billion per month to $80 billion, the answer could be "not much."
But here is a sobering analysis from the Wall Street journal today:
"The government said job-creation in May and April topped previous estimates by 20,000 and 50,000 jobs, respectively. Yet even if job growth suddenly surged to 225,000 per month, the economy still wouldn't return to full employment until early 2018, Shierholz recently calculated using Congressional Budget Office data."
Full employment, depending on who you ask, means anywhere between 4 and 6%. What IS the new normal? In the same article, one managerial level management was quoted:
"We need to have several quarters of demonstrably solid growth in terms of jobs before [the Fed] starts to do anything material," said Michael Thompson, managing director with investment research firm S&P Capital IQ. When the central bank does start scaling back its bond purchases, it will do so "in thimbles," he predicted. "You might not even notice it's gone."
Because of the extended, if unofficial holiday, today, Friday, volume has been light, decision-making has been absent in creative viewpoint on the American economy, and generally conservative thinking has dominated. (Don't want to be the junior trader on the desk left holding the bag. So, when in doubt, sell.)
Perhaps more sober - or probably slightly hungover - minds will re-appear on Monday.
But, remember. Every time gold dips, there is an excellent opportunity to make money when it bounces back up.
Wishing you as always good trading,
Gary S. Wagner
Market Forecast: We spoke about support at 1234 in gold as a critical area if we were to remain in any kind of a rally state. That support was utterly devastated today when new data was released in the jobs report. This positive report moved both the equities markets and the US dollar to higher ground and move the precious metals markets along with much of the commodity complex strongly lower. As you will see in today’s report once the market broke below 1234 it was a virtual cascade to an intraday low of 1207. In today’s video we will look at our appended Elliott wave count which incorporates our current bear count to put perspective into gold and silver prices. Based upon our current count it appears as though we are in a corrective wave, wave four. A counter wave in a bear cycle is going to have two of the three waves moving higher or counter trend. We will identify this current ABC count as it falls within current gold prices.
Long gold at 1240 stop below 1229 hit
Long silver at 19.65 stop below 19.25 hit