A Melman Minute
| By | Leonard Melman |
|---|
As long time readers know, I love song lyrics, particularly those old-time favourites which clearly illustrate a particular point of view. Within this morning's context, one of my favourites goes like this:
"First you say you will and then you won't
You're undecided now, so what're you going to do?"
CONFLICTING JOBS REPORTS
When it comes to analyzing jobs information just released around the world, that little couplet appears to be particularly applicable. Two specific reports are involved.
First, we must look at the US Department of Labour (DOL) jobs report for the month of April and for those who believe it accurately reflects the US job scene the report provides excellent material for smiles and eager anticipation. As noted in a Reuters news article this morning, "U.S. job growth increased at the fastest pace in more than two years, suggesting a sharp rebound in economic activity in the second quarter. Nonfarm payrolls surged 288,000 last month...that was the largest gain since January 2012 and beat Wall Street's expectations..." We were also told that the Unemployment Rate for April plunged to 6.3%, a 5 1/2 year low.
It is also worth noting the additional 'good news' that the broadest measure of unemployment which includes those who have stopped looking for work and those who have part-time jobs but are seeking full-time employment dropped from 12.7% in March to 12.3% in April.
While looking through some of the details in the report, we noted this gem: "...government payrolls rose by 15,300..." This strikes us as significant since we have been told relentlessly that government costs were declining and government was keeping a tight control on spending which should ultimately lead to deficit reduction and eventual elimination. The contradiction between these stated goals and a rise in government employment strikes us as noteworthy.
There is also another apparent contradiction between the just-issued jobs report and yesterday's DOL release showing a sharp increase in new unemployment claims during the last two weeks of April. Data from that report showed increases in the number of new filings for Unemployment benefits rose from 312,000 on April 12 to 330,000 on April 19 to 344,000 for the week ended April 26. We cannot but wonder how the unemployment rate was plunging and all those new jobs were being created at the same time that the number of new unemployment claims was soaring.
Meanwhile, over in Europe, in direct contrast to this morning's jubilation over the DOL report, Bloomberg News Service headlined their report on the European jobs situation with this gem: "Euro Unemployment Holds Near Record..." and they weren't referring to record lows either as we were informed that, "...The jobless rate (for the Euro community as a whole) was 11.8% in March, a level which was reached in December and near the record of 12 percent last year..." One noted economist, Christian Schulz of Berenberg Bank in London, declared, "...At the current pace, it will take years if not decades to reverse the increase in unemployment by 7.5 million since 2008."
One of the particular present concerns of the European community is the trend toward disinflation and another economist, Jonathon Loynes of Capital Economics in London added, "...For the foreseeable future, the vast amount of slack in the Euro-zone labour market will add to the disinflationary forces at work in the currency union..." (Our emphasis)
The combination of these two reports leaves us with what we regard as the rather valid question of just how the American job market could have improved so dramatically while Europe and China - also vast economic markets - are apparently stagnating.
However, putting that question aside, at The Melman Report we can see two fundamental directions by which the performance of the precious metals could be advanced by this recent data if it turns out to be truly accurate.
One means is that a dramatic decline in America's Unemployment Rate, particularly when that decline is being at least partially driven by a rise in government employment, could easily lead to the beginning of a wage/price upward spiral which could directly affect the rate of Consumer Inflation in a positive manner. The other is that the European Central Bank could accelerate its efforts to move away from disinflation through stimulation of the economy and additional programs related to (fiat) monetary expansion.
Action in the gold market this morning seems to have taken these concepts to heart as indicated by the short-term chart of gold which began to rally sharply - following overnight selling - as the new data was being 'digested'.
WHITHER THE EURO?
In terms of the European situation, Canaccord Genuity market strategist Martin Roberge told the Financial Post he, "...believed that another round of stimulus may be required for risky assets to move into a higher trading range...The most likely source is the European Central Bank as he noted that deflationary forces are mounting in the Euro zone." The Financial Post article then stated, "...But the strategist also noted that a move in the Euro above US$1.40 appears to be a pre-requisite for the ECB to embark on a stimulus program." (Our emphases)
With that in mind, let us take a look at the intermediate term chart on the Eurocurrency which covers the past five years.
The Euro has been in a clear uptrend since the middle of 2012 and, unless that trend is quickly reversed, it appears most likely that the 1.40 barrier will be crossed in the relatively near future. If Roberge is correct, that could lead to an acceleration of money-printing forces within the European Economic Community.
From our precious metals point of view, that would appear to be a significant plus going forward.
BUT WHAT ABOUT INTEREST RATES?
Despite frequent contrary commentary, it is our believe at TMR that higher interest rates - if they are driven by rising inflationary expectations - are positive for the precious metals and we need only point to the experiences of the late 1970s as an example. As interest rates were driven to their spectacular highs of late 1979 and early 1980, the price of gold rose in almost perfect lockstep - and we offer two charts as proof. Please examine the period 1977 to 1980 for each chart.
It is abundantly clear that from 1977 through early 1980, the bond market was moving sharply lower - thereby indicating rapidly RISING INTEREST RATES. It is also interesting to note that inflation was rising rapidly throughout this time frame.
It is also abundantly clear that during the same time period that interest rates were rising rapidly, gold was in the midst of a SPECTACULAR RALLY! Despite this clear evidence that an inflation-driven rise in interest rates has been historically beneficial to the precious metals markets, many commentators still declare that rising interest rates are bad for gold and silver.
I believe that in the next few years, they are about to get the lesson of their lives.
As of 8:45 AM PDT, financial markets in both Canada and the USA are moving in opposite directions with the Dow Industrials off by nearly 30 points while Canada's TSX Index - perhaps reflecting higher metals prices - is up by over 60. Precious metals are continuing their strong rally with gold once again above the $1,300 mark - a gain of almost $20 on the session - while silver had advanced by 52 cents to $19.54 per ounce. Base metals are slightly higher on balance while mining share indexes have gained about 2%.
In other markets, the US Dollar Index is unchanged at 79.59; Crude Oil is moderately higher and just traded at exactly $100.00 per barrel and the TYX Index of rates on US Treasury 30-year bonds has just hit a yearly low, down by 22 basis points to 3.383%.
All quotes US$ unless otherwise indicated.
Next "Melman Minute" scheduled for Monday, May 5, 2014