Gold Prices Choppy after Payrolls / Commodities / Gold and Silver 2018

The U.S. economy added only 148,000 jobs in December.Gold prices reacted in a choppy way, confusing some analysts. Why?

December Payrolls Disappoint

Total nonfarmpayroll employment increased only 148,000 in December, the slowest pace in threemonths. The employment gains were generally widespread, but the biggestemployers were construction (+30,000), leisure and hospitality (+29,000),education and health services (+28,000), and manufacturing (+25,000). Thelatter rise is a particularly bright spot, given the not-so-distant problems ofthe sector.  On the other hand, retailtrade cut 20,000 jobs, which confirms that some traditional brick-and-mortar storesstruggle.

The rise followed anincrease of 252,000 in November (after an upward revision), according to the U.S.Bureau of Labor Statistics. This is slowdown. An unexpected slowdown. The markets anticipated191,000 job gains in the previous month. Moreover, employment gains in Octoberand November combined were 9,000 lower than previously reported. When it comesto the medium term, the annual job growth rate remains in a downward trend, asthe chart below shows.

Chart 1: Total nonfarmpayrolls (red line, right axis, percent change y-o-y) and gold prices (yellowline, left axis, London P.M. Fix, $) over the last five years.

On the surface, the reportshould be negative news for the U.S. labor market and positive for the gold market. However, the price of gold didn’t rally (see the chart below), making many so-called experts uncomfortable.Why?

Chart 2: Gold prices fromJanuary 5 to January 8, 2018.

Labor MarketRemains Solid

The first reason is that the Employment SituationReport showed that the U.S. labor market remained healthy. Job gains averaged204,000 in the last three months, significantly more than what is needed tokeep up with the growth of population. In the whole year, about 2 millions jobswere created. Moreover, the unemployment rate stayed at 4.1 percent, apleasingly low level. And wages saw gains. Average hourly earnings rose by 9cents to $26.63. It means that they jumped 2.5 percent in 2017. Does this looklike an economic slowdown to you? Neither does it to precious metals traders.Although the price of gold jumped initially from $1,316 to $1,321 after therelease of the report, the direction was quickly reversed and the yellow metalfell below $1,314, just to steadily undo the losses. Gold can be quite choppy,can’t it?

InflationStill Lacking

Another issue is that inflation is still subdued. Thisis why data on inflation is now muchmore important for the Fed and, thus,markets. Everyone sees that the labor market remains tight and economic growthis picking up. What is missing to fully please the monetary hawks is theinflation reaching the U.S. central bank’s target. This is why gold does notreact as strongly to nonfarm payrolls as it used to in the past. Even if theheadline surprises (within a certain range), the general outlook for the U.S.labor market will remain positive and little changed.

Conclusions

The December U.S.nonfarm payrolls were worse than expected. The economy added only 148,000 jobsin the last month, significantly below expectations. But the price of golddidn’t rally. This is because the number was much more than Fed needed tomaintain its policy of gradual tightening. The unemployment remains low and the labormarket still looks solid. Surely, if the slowdown continues, the FOMC may become morecautious. However, it should remain on track to raise interest rates in March and twicelater in the year. Indeed, San Francisco Fed President John Williams said onSaturday that the Fed should raise interest rates three times this year giventhe strong economy, while Cleveland President Loretta Mester expected roughlyfour interest rate hikes. Don’t underestimate the power of the hawkish side!

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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