Soft Jobs Data Triggers Big Rally in Gold

Gold prices soared sharply higher Friday, as weaker-than-expected U.S. employment numbers are expected to keep a lid on Federal Reserve interest rate hikes this year.

The May U.S. employment report showed that job creation slowed significantly last month. Economists had forecast 184,000 new jobs for May, but only 138,000 new jobs were reported.

Interest rates on the 10-year yield fell, precious metals climbed and the U.S. dollar sold off against major U.S. currencies following the employment data.

What does the latest data show about the economy? "Given reports that job openings are near all-time highs, it suggests that businesses are struggling to fill these positions in an increasingly tighter market," says Satyam R. Panday, U.S. economist, at S&P Global, Ratings.

"Meanwhile, the unemployment rate ticked down 0.2 percentage points to a new cycle low of 4.3%, but for the wrong reasons--it was largely because lots of people left the labor force and fewer people were employed compared with the month before. Wage gains remained on a soft track with a mere 0.2% month-over-month rise, holding the year-over-year rate at 2.5%.
 Panday says.

Gold investors believe this means the Federal Reserve will not be in a hurry to significantly raise interest rates as that could harm the U.S. economic growth picture. The Federal Reserve is still expected to hike interest rates at its mid-June meeting, but rates remain far below historically normal levels.

 

"We still expect the Fed to lift policy rates later this month. Recent Federal Reserve communications have telegraphed that a June rate hike is all but certain. However, the monetary authorities will certainly be watching the job numbers in the coming months before they consider moving in September," Panday says.

The Federal Reserve has kept interest rates at historically low levels in order to protect the fragile economic recovery in the years since the 2008 global financial crisis. The latest jobs numbers suggest the Fed will continue to tip toe higher at a very slow and gradual pace. That is positive for gold, which competes with yield-bearing instruments.

Market Update – Flight to Safety Trade Seen Within the Equity Market

The U.S. stock market continues to climb to new all-time highs, while gold and silver post strong rallies as well. Digging deeper inside the stock market rally, one finds interesting clues that signal a flight-to-safety trade within the equity arena.

The S&P 500 is divided into various sectors, such as Financials, Consumer Staples, Energy, Health Care and more. Investor sentiment can be determined from which sectors gain the most investment.

There are typical defensive and safe-haven sectors within the equity market – and that is where investors are gravitating toward now. In May, investors poured money into the high yielding utilities and consumer staples sectors, which advanced 3.6% and 2.7%, respectively. Only technology had a better performance in the month, ending up 4.2%.

"The outperformance of these sectors well-known for paying generous dividends seems to go against ones' investing intuition in a rising rate environment," says Lindsey Bell, investment strategist at CFRA.

"Investor's recent tendency toward the defensive, high yielding sectors likely reflects the increased level of political uncertainty in the marketplace and a flight to safety," Bell explains.

"Utilities, real estate and staples achieved most of their May gains in final two weeks of the month, when concern regarding the Trump administration was heightened. Over the course of the same period, the 10-year Treasury yield declined from 2.34% on May 15, to 2.21% on May 31," Bell adds.

Even equity investors are getting nervous and are moving money to more defensive areas of the stock market. Meanwhile, gold and silver prices continue to advance.

The new all-time highs in stocks offer savvy investors the opportunity to cash out on high-priced equities and shift those assets into gold and silver now at relatively attractive prices. Once equities turn, you will have missed the opportunity to lock in the high equity price and the low metals prices. Discuss your portfolio diversification strategy with your Blanchard portfolio manager today at 1-800-880-4653.