Why Today's Labor Report Is Good For Precious Metals

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 |  Includes: GLD, SLV
by: Tim Iacono

You wouldn't know it by looking at the price of gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) today, but this morning's labor report was actually a positive development for precious metals.

As detailed here earlier, nonfarm payrolls rose by 236,000 while the unemployment rate fell from 7.9 percent in January to 7.7 percent in February and, at first, this was seen as a negative development for gold and silver prices.

Since the headline jobless rate for the household survey moved closer to the Federal Reserve's target of 6.5 percent, many investors and traders thought this made it likely that the central bank would slow or halt its $85 billion money printing effort sooner rather than later.

To no one's surprise, gold and silver prices plunged when the news first broke.

But, metal prices recovered quickly after the details of the household survey were studied, and for good reason.

Some 300,000 Americans were no longer counted as "unemployed" in February, but this was due largely to 296,000 more people being counted as "Not in the Labor Force" last month because they stopped looking for work.

Most of these people still want a job, but they've given up looking.
In fact, as shown in this graphic, the number of people who are no longer counted as "unemployed" but who still want a job rose by 190,000 last month, some 20,000 more than the 170,000 increase in the number of people counted as employed.

Job creation of 170,000 by itself is not enough to lower the jobless rate two-tenths of a percent. But, because of the way the Labor Department calculates this important statistic, the combination of modest job growth and a large number of people giving up looking for work will do the trick.

Going back a full year, the unemployment rate has fallen from 8.3 percent to 7.7 percent, but, here too, this is primarily a result of people leaving the labor force. Since February of 2012, the household survey shows 1.47 million more people employed, but 1.67 million people have left the labor force during that time, many of whom still want jobs.

Assuming a U.S. population growth rate of about 0.8 percent per year results in about 2.5 million more Americans than a year ago, most of whom are of working age.

In short, despite the falling jobless rate, there is virtually no progress being made toward improving the labor market.

More importantly, anyone extrapolating downward from the recent jobless rate trend and concluding that the central bank will soon halt its asset purchases is likely to be disappointed.

It is far more likely that, with the modest improvement in the U.S. economy in recent months and with the media repeating this over and over, more people will begin looking for work rather than stop looking for work.

All else being equal, this will drive the unemployment rate higher, not lower.

Now, there is no question that all the Fed money printing to date has had a positive impact on the economic data and it will continue to do so. Super-low mortgage rates have given the U.S. housing market a big boost and construction payrolls have surged in recent months.

But, that doesn't mean that the jobless rate will continue to fall.

In fact, from this point forward, an improving economy will probably push the jobless rate further away from the Fed's 6.5 percent threshold as fewer people are counted as "Not in the labor force."

More will be learned a week from today when the February inflation report is released, but my guess is that we'll reach the Fed's 2.5 percent inflation threshold before we reach their 6.5 percent jobless rate target.

Sharply higher gasoline prices combined with surging core inflation last month will likely change the current perception of "tame" consumer prices and that too will be a positive development for precious metals markets.

Disclosure: I am long GLD, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.