The reaction of gold to the Non-Farm
Payrolls report last Friday brings home the attitude of the markets in general,
and the realisation that the time for normalising monetary policy in the USA
is, perhaps, fast approaching. Gold has long been used as a safe haven, and in
particular as a hedge against the inflation that many thought would inevitably
follow Quantitative Easing in the US.
The inflation did not happen, of
course, and in fact the fear now is of deflation, in all developed economies.
Gold held out for quite a while, moving up again when the various false alarms
about the strength of the US economy in particular played themselves out. Now,
however, the inexorable rise in the leading indicators, of which payrolls are
perhaps the most significant, might be causing the gold bugs to capitulate. A
breach of the support level shown on the chart above would be significant.
The
devil is in the detail
The devil is always in the detail.
While most focus was on the robust 257k rise in US Non-Farm Payrolls on Friday
last, as against 234k expected, the most important parts of the report from the
Bureau of Labor Statistics were the figures for Average Hourly Earnings and the
labor force participation rate. Both also rose, with hourly earnings coming in
comfortably above the inflation rate for 2014. Pay rises are starting to become
a feature of the employment landscape and the number of people actively looking
for work is starting to increase.
Wages and inflation have always been
closely linked. At times of rampant inflation, workers look for more money in
order to maintain their buying power. Sometimes this ignites a vicious cycle
that leads to even greater inflation. It is precisely the fear of the pendulum
swinging from where it is now in terms of falling consumer prices, to the
opposite situation, that will inform the Federal Open Market Committee (FOMC)
in its core interest rate decisions. Interest rate rises are the tool of choice
for central banks that want to limit inflation. The rise in the participation
rate must be the last brick in the wall of factors that are taken into account
in monetary policy in this case. Rate rises must now be a racing certainty
Stateside, and sooner rather than later.
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