- December 12, 2022
- Category: Gold
If you want to stay ahead of future gold movements, take the time to consider the state of the U.S. labor market. Jobs are universally regarded as an important indicator of economic health. Of course, the job rate does not directly cause the value of gold to go up or down, but every month the Bureau of Labor Statistics releases an Employment Situation Summary that gives investors and business owners an idea of broader economic health.
The critical link, especially in the long term, is between job and interest rates. When businesses are creating lots of new jobs, there tends to be more demand for loanable funds, which puts upward pressure on interest rates. More importantly, the Fed is more likely to target a higher federal funds rate (a much more direct method of influencing interest rates).
As any experienced gold investors will tell you, interest rates and gold prices are highly intertwined.
Understanding the “Job Rate”
The job rate is an essential macroeconomic indicator to understand. Whenever economists or talking heads discuss the “job rate” or other national employment figures, they typically refer to the current U.S. Non-Farm Payroll data. When quoted directly, non-farm payroll often relates the month-by-month changes in U.S. jobs. (Note that this is different from the non-farm payroll above expectations figure).
Higher non-farm payroll numbers indicate that employment, as traditionally defined, is healthy. It does not necessarily mean that the average employee is enjoying a high standard of living or that there are not structural problems in the economy, but it is generally assumed that healthy employment numbers are a symptom of positive fundamental conditions.
Gold Demand and Economic Signals
Thanks to its long list of practical uses and unique features, gold has always maintained economic value. No matter what else is going on in the business and investment world, there is always some demand for the yellow metal.
However, some of the demand for gold is driven by larger macroeconomic conditions. People understand that gold always has value, so it serves as a hedge against other investments when they go bad. Gold demand tends to be higher when it appears that companies are losing money, stocks may decline, the dollar is losing its value, and people might lose their jobs.
Jobs, Fed Policy, and Inflation
The U.S. Federal Reserve impacts the price of gold — and every other precious metal, for that matter — more than any other institution on the planet. This is true for short-term and long-term gold prices. The Fed guides the rate of growth in the money supply (inflation) and is a chief contributor to unstable asset bubbles in equity, real estate, and bond markets.
In recent decades, Fed policies have been heavily dictated by two factors. The first is the measured U.S. unemployment rate. Second is the nominal health of American asset markets, especially the stock market.
If we focus on jobs for a minute, there has a clear correlation between high or rising levels of unemployment and expansionary monetary policy. Often, but not always, an improving job market signals contractionary monetary policy.
Here are some rules of thumb:
- When the unemployment rate increases, the Fed is more likely to expand the money supply and lower interest rates. This puts upward pressure on gold prices.
- When the unemployment rate decreases, the Fed is more likely to contract the money supply and raise interest rates. This puts downward pressure on gold prices.
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