On Friday, December 6th, we have one of the most anticipated reports left in December as the U.S. Department of Labor releases its monthly employment report. This report actually includes two separate reports based on Labor department surveys, and they make up the data release that investors key in on - primarily the unemployment and the US Non-farm Payrolls portion of the data.
Why Do Gold Investors Care?
The details of this report are beyond the scope of this article, but this report has had a significant impact for the gold price over the last year. Charts like the one below have been all too common on the days of this report, and the chart below shows the reaction of the market to the last Non-Farm Payrolls report - not a pretty sight for gold bulls.
The reasoning for large drops in the gold price when this report is released is the following:
The Fed has stated that it will begin to taper when it believes the economy has picked up and the labor situation has gotten better. The non-farm payrolls is one of the best official measures of the health of the labor market, thus a good unemployment report means that the probability of a taper increases. That means the Fed will decrease its quantitative easing program, which results in a decrease in the growth of the money supply. The decrease in the money supply growth rate means that investors will be less likely to want to purchase gold as a US Dollar hedge.
Though we think there are great problems with this reasoning, it has been the dominant mind-set over the last six months and has been a major factor in the actions of investment players within the gold market.
The ADP release earlier this week, which closely tracks Non-farm Payrolls, was especially strong as it showed the economy adding 215,000 jobs in November and beat economist expectations. We believe that this week's Non-farm Payrolls will also show an increase in jobs growth, and thus short-term investors should prepare for this scenario.
A Good Unemployment Report for This Friday - Time to Purchase Gold
So why is it good for gold when in the past good releases of this report resulted in large down days? The reason is because when the positive ADP report was released on Wednesday, something very interesting happened to the gold price… it went up. Initially, it dropped as expected, but then it quickly reversed course and ended up strongly up - a very significant reversal.
We think this reversal may show that something has changed in the short-term sentiment picture and the market is realizing that maybe this "Taper is Bad for Gold" mentality is changing - and we think this is the proper understanding of taper.
The Fed Ending Quantitative Easing is Not Gold's Kryptonite
First of all, gold had risen for years without any tapering or quantitative easing. Gold started its current bull market in 2001 at just under $300 per ounce, and proceeded to rise to over $1000 before any QE, finally falling to around $760 when QE was announced (this was the average monthly price based on the LBMA for November 2008).
*2008 computes gold's price until November 2008, when QE1 was announced
We have gone over some of the reasons we believe that gold has risen over the last decade in a previous article, but the point here is that quantitative easing is NOT needed for gold to rise in price - gold's initial bull market showed very strong price gains without any Fed easing. So the mindset that tapering will finish off gold is simply not based on historic fact.
The Fed is Not Actually Cutting the Money Supply
The second error in the current short-term trading reaction to the Non-Farm Payrolls report is that is that tapering does not reduce the money supply.
Source: Sprott Asset Management
The wonderful chart above by Sprott Asset Management shows the real implications of taper. Stunning right?
The so called "taper" is not a reduction in the money supply as the market seems to think, it is simply a reduction in the growth of the money supply. It's pretty much the same as a "Congressional Budget Cut" - you're reducing the increase of your spending. The money supply as recognized by the Fed's balance sheet is still growing at parabolic rates compared to historical growth - not much of a reason to sell gold.
What Should Gold Investors Do?
The counterintuitive jump in gold prices on a good ADP report signaled to us that we may have seen an inflection point that shows a significant change in the mentality of short-term market participants. The realization that tapering is not really going to cut the money supply, and it may have significant consequences to both the stock and bond markets, may not be a reason to sell gold - and in fact may be a reason to buy gold.
While we are not short-term traders and believe that gold should certainly be owned for the long-term in the current financial environment, we do see a significant opportunity in a good Non-farm Payrolls report this Friday if the gold price drops. In our opinion, this may be a wonderful opportunity to purchase physical gold and the gold ETF's (SPDR Gold Shares (GLD), PHYS, etc.) at a discount. Additionally, risky investors looking for some leverage on the gold price may be interested in purchasing the precious metals miners for additional leverage as some of the blue-chip miners are trading at steep discounts such as Goldcorp (GG), Agnico-Eagle (AEM), and Newmont Mining (NEM), or even some of the explorers and silver miners such as First Majestic (AG).
If a good report is released on Friday it may be a terrific time to increase or start a gold position, as some traders will still be trading the "taper" trade on gold and short it, and thus a sell-off would ensue. Investors should take advantage of these traders and gladly purchase their gold before the realization sets in that the Fed's balance sheet is still rising at unprecedented levels.
When opportunity knocks, smart investor should open that door. As short-term traders sell their gold anticipating others to join in based on a false narrative, long-term gold investors should gladly make the trade and take the gold.