GOLD PRICE NEWS - The gold price hovered near unchanged, trading at $1,133.50 per ounce, following the release of the U.S. employment report. The price of gold initially declined on the better than expected headline numbers before bouncing back as the market digested an unemployment rate that shows very few signs of moving markedly away from 10%. Nonfarm payrolls fell 36,000 versus market expectations of 68,000 job losses while the unemployment rate dropped 0.1% to 9.7%.
The price of gold has surged over the past month, rising $101 from the low posted in early February - a rally that, over the same time frame, has boosted the share price of the gold mining producers by 11.9%, as measured by the Market Vectors Gold Mining ETF (GDX).
With unemployment still hovering near 10%, it is highly unlikely there will be any move in the fed funds rate in the near future. As noted by Macquarie’s equity research team - since 1950, the Federal Reserve has never raised rates with unemployment above 7.7%. With the labor participation shrinking, the true unemployment rate is actually much higher, near 12% according to David Malpass, chief economist at Encima Global.
As was the case with the recovery following both the 1991 and 2002 recessions, the lack of job creation presents a strong argument against raising interest rates too soon. In both of those business cycles, the Federal Reserve waited approximately 2.75 years after the recessions ended before hiking rates. The implications on both the gold price and the gold stocks are significant should the Fed follow a similar path.
St. Louis Federal Reserve President James Bullard told a small group of reporters yesterday that the recovery is in the very early stages and monetary policy should remain “very accommodative.” The gold price has been supported by the unprecedented actions of the Fed, including buying over $1.25 trillion in housing derivatives. The expansion of the Fed’s balance sheet has the potential to unleash inflation in future quarters and the rising gold price is an indication of the market’s skepticism in Chairman Bernanke’s ability to implement a smooth exit strategy.
This “check writing” by government, as termed by PIMCO’s Bill Gross, has been a global phenomenon, occurring across the globe and leading to strong rallies in the gold price as measured by all of the world’s major currencies. In terms of the euro and the British pound, the gold price has recently hit all-time highs.
Inflation expectations remain relatively subdued, providing the Fed cover to delay the normalization of monetary policy. With money market accounts earning zero, the opportunity cost of holding a sterile asset such as gold has nearly evaporated. With a mild uptick in inflation, the level of real interest rates will continue its descent below zero - at which point the purchasing power of cash in the bank actually erodes on a daily basis. Negative real interest rates have historically been associated with gold bull markets and the longer real rates trade below zero the faster the currency degradation - all of which provides a tailwind for a higher gold price.
