Sunday, February 8, 2015

Gold shows the way after NFPs | The devil is in the detail

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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