Gold and Silver Consolidate After Mixed US Jobs Data
Of all the economic data sets that influence the direction of financial markets, the US Non-farm Payroll (NFP) is widely accepted as having the greatest potential to spin asset prices into a frenzy. That was the case after last Friday’s NFP report.
Just after the employment numbers were released, Gold and Silver prices spiked higher, and it looked as though Gold would post a new all-time high.
However, as the data was dissected and revised, the metals complex followed the stock market lower as the US Dollar firmed.
For the week, physical Gold in USD closed fractionally lower, while Gold priced in AUD rose by 1.1%, which pretty much mirrored the 1.4% loss for the AUD verses the USD.
Silver prices underperformed Gold for the second straight week as USD Silver was down 2.9%, while AUD Silver slid 1.8% lower for the week. It’s worth noting that the Gold versus Silver ratio pushed back over 89.50 last week. This has been a level at which Silver has outperformed Gold over the last 12 months.
Drilling down into the NFP report, there was some good news and some bad news.
First the bad news: the August payrolls number came in at 142K, a small miss to estimates of a 165K print, and a big jump from the downward revised July print of 89K.
The good news, however, is that while the payrolls print missed, the unemployment rate actually dipped from the critical level of 4.3%, to 4.2%, in line with expectations.
As illustrated on Chart 1, in August, the US added 142K jobs, which was slightly below estimates of a 165K print, but hardly a wide miss as in previous months. Then again, as has become the norm, both previous months were revised sharply lower, so once again expect the August print to suffer the same fate.
Specifically, as shown on Chart 2, the Bureau of Labor Statistics said that the payroll print for June was revised down by 61,000, from +179,000 to +118,000,and the change for July was revised down by 25,000, from +114,000 to +89,000. With these revisions, employment in June and July combined is 86,000 lower than previously reported. It also means that 4 consecutive NFP job prints have been revised lower, and, astonishingly, 6 reports out of the past 7.
Now that the FED has pivoted to an easing bias, how will last Friday’s NFP report impact the expected rate cut at their meeting on September 18th?
While the NFP numbers were disappointing, they were nowhere near panic inducing, which is what a 50bps rate cut would signal. To put a finer point on this, Wall Street equity valuation forecasts are so desperate for an easing that every first-tier economic report is viewed through the prism of how the data will impact the FED’s monetary policy decision.
Friday’s price reversal after the NFP report is a perfect illustration of the skittishness of financial markets.
The initial headline jobs numbers were weak, so stocks and precious metals rallied, and the USD slipped lower on perception that the report was weak enough force the FED to cut by 50bps. However, as the day progressed, and after a few comments from FED officials, the forward rate markets priced out a 50bps cut down to slightly more than 25bps.
This intra-day reduction in rate expectations was all it took to see US stocks fall sharply, Gold and Silver to slide lower and trigger a US Dollar rally. The overarching dynamic is that US paper assets are overvalued by many metrics relative to US economic GDP growth, which is why, as rate expectations were dialled back, the SP 500 index lost 4.4% last week.
The FED, as well as other central banks, understand that a sharp decline in major stock indexes increases the risk of a systemic banking crisis. This is one of the reasons why central banks have been buying Gold at a record pace over the last 18 months.
Physical Gold and Silver prices have been steadily rising over the last 10 months.
The paper asset price volatility investors saw last week underscores the logic of owning hard assets as a cornerstone to your long-term wealth creation strategy.
There is little doubt that the FED will lower rates to some degree later this month. But will lower rates really be enough to see global equity markets maintain their lofty price levels?
Steadily increasing the amount of Gold and Silver holdings within a balanced portfolio is a time proven method of mitigating some of the risk of a protracted downturn in equity market prices.
Interested in exploring the options to add precious metals to your investment portfolio? Book your free consultation here.
Chart 1: US Payroll
Chart 2: Payroll Revisions
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