How The Job Market & The Fed Affect Gold Prices

This as is an excerpt from the premium update from the The Financial Tap. They offer a FREE 15-day trial.

If we are to believe market commentators, then Gold is being held back because the FED’s QE may be ending sooner than expected.  The argument is that if the economy improves, the FED will back out of asset purchases (QE), and the gold bull market will end.  But the FED has said it would continue to purchase assets to the tune of $85B per month, for as long as the unemployment rate remained above the 6.5% mark.

So the question becomes, when should would we realistically expect to see this level achieved.  In order to bring unemployment down to that 6.5% level, the economy will need to add nearly 5 million jobs.  That amount also includes providing jobs for the first time workers entering the force.

US_employment_2008-2013

As you can see from the above chart, we’ve struggled to add more than 200k jobs in any given month.  Also this business cycle is now in its 4th year and in danger of entering into a recession.  The FED has held rates at zero for years and has implemented 5 years of QE, yet the best this economy can manage is employment growth that barely keeps up with a rising population.

In 2013 the economy also faces some headwinds.  We’ve moved from an environment where the government was stimulating (spending), to one where they are cutting spending at rates not seen since the 90’s.  The coming budget fights will surely result in additional cuts; these will only serve to slow the economy further.  The end of the payroll tax holiday has already hit the majority of US taxpayers as have tax increases on the high income earners.  These newly implemented policies, along with what will surely be additional austerity measures in the coming budget showdown, add significant downside risk (shock) that is not adequately priced in by the markets.

The impact of these policies was evident within this week’s release of negative Q4 GDP data.  The main component bringing down GDP was a reduction in government spending.  Although this data was ignorantly dismissed “as a one off” miss, it demonstrates that where the government had a heavy hand in this recovery, its absence or hastily withdrawal from it in 2013 and beyond will only serve to be a drag on employment growth.

Let’s put the threat of a recession and a further slowdown in job creation aside for a minute.  Let’s choose to ignore it and just assume a more optimistic growth run rate at 200k per month.  Even at this rate, we’re talking about the FED pumping in $85B per month for the next 2.5 years!  That’s an additional $2.5T to add to their existing $3T balance sheet.  So under “rosy forecasts”, we’re looking at a FED balance sheet in the order of $5T-$6T by 2015.  If this economy experiences even a mild contraction or slowdown, then that time-frame would easily be pushed out towards 2017-2018 where the FED’s balance sheet will be closer to $8T.

unemployment_6.5_percent

So that brings us back to the FED’s support of the economy through asset purchases of bonds and mortgage back securities.  I find it almost impossible that the FED can withdraw prematurely; especially as the economy is now feeling the effects of the government implementing growth slowing austerity.  But regardless of the government cuts, the US will continue to rack up $1T annual deficits that will add to the pile of $16T IOU’s that have been issued.  By 2017, that number will easily exceed $20T and the US will find itself in the position where it simply could not sustain any increase in the interest rate it pays on this debt.  There is just no way the FED could possibly withdraw itself from the bond market at that point, as we’re beyond the 100% of Debt to GDP level and climbing.  The interest burden alone will force the FED to remain active, regardless of what the unemployment rate is.

For those members who fear an end to this great gold bull market, please put this into perspective.  Understand that the powers to be will not or cannot tell the public what is really occurring.  Partisian battles in Washington regarding debt containment are just choreographed noises to appease the masses.  We’ve entered the final stages of a debt super cycle and the powers have chosen to confront this cycle by printing more fiat to “cover the tab”.  By increasing the amount of fiat is supply, you reduce the burden of debt as you devalue its worth and raise the “nominal” price of all assets.

This as is an excerpt from this weekend’s premium update published on Sunday (2.03)  from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly, as well as real time trade alerts to profit from market inefficiencies. They offer a FREE 15-day trial where you’ll receive complete access to the entire site during the trial. Coupon code (ZEN) saves you 15%.

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