Gold is a must-own asset as Europe declares war on savers

Two whopper economic news items capped this week for gold, which posted a small gain for the week but nonetheless remains trading in a tight range between $1,245 and $1,255.

On Thursday, gold bounced back with its biggest gain in three weeks after the European Central Bank unveiled a range of currency-devaluing measures, including an unprecedented negative interest rate, aimed at spurring inflation in the growth-strapped eurozone. Gold rose about 1% to hit $1,256, while silver gained about 1.5% to retake the $19 level.

The negative-rate move, which will see the ECB charging banks to hold their reserves, will have the effect of further punishing savers, who will be hit with fees and even lower returns on deposits as European banks pass the news costs along.

The ECB also cut some other key interest rates and left the door open to outright bond-buying programs like the quantitative-easing plans of the Federal Reserve and the Bank of Japan.

“Are we finished? The answer is no,” ECB chief Mario Draghi said. “We aren’t finished here. If need be, within our mandate, we aren’t finished here.”

Draghi: We’re not targeting savers

Draghi also tried to soften the potential blow of negative rates upon savers, passing the buck to individual banks’ policies. “There is a deep misunderstanding here. The rates we’ve changed are for the banks, not for the people,” he said. It’s wrong to think the ECB wants to “expropriate savers. ...The concerns of savers should be taken very seriously.” Draghi, however, added that the decision to lower rates for households is the decision of banks, not the ECB.

The measures, aimed at weakening the euro, could pressure the Fed to slow its own purported rate-hike plans. Why? Because with its mandate to generate jobs and reduced unemployment, a stronger dollar will reduce U.S. exports, and already the U.S. trade deficit has widened to a level that already is weighing on second-quarter GDP. That’s a recipe for a possible recession given that Q1 posted negative growth.

Jobs report was no blockbuster

Friday then brought the nonfarm-payrolls report for May from the Labor Department, which met expectations with a 217,000 print, but not much more. That sent gold soaring again early Friday to almost $1,260 before another pullback to near $1,252 by midday.

“There's a little left to be desired with that number. It didn’t really clearly beat expectations,” Bill Baruch of iiTrader told The Wall Street Journal.

The lackluster number didn’t stop the economic cheerleaders from declaring an end to the Great Recession once and for all. They were quick to cite the fact that total nonfarm employment in May reached 138.463 million, surpassing the previous high point of 138.365 million in January 2008.

“Agonizingly” slow gains

But not so fast, Heidi Shierholz of the Economic Policy Institute told the Los Angeles Times. “Things are improving, but it’s happening agonizingly slowly,” she said. After all, with the working-age population having grown by 14.5 million people since January 2008, the economy is still 6.9 million jobs short of where it was at the start of the recession, given that growth. That’s one reason why the unemployment rate held steady in May at 6.3%.

Furthermore, the percentage of Americans 16 or older who do not have a job and are not actively seeking one remained at a 36-year high in May, according to the Bureau of Labor Statistics. More than 92 million Americans are out of the labor force, putting the labor participation rate at 62.8%. With 37.2% not participating, the rate is lodged at a 36-year high.

And look at the types of jobs being created. According to Zero Hedge, more than half of payroll growth came from low-paying sectors: education and health (63K), leisure and hospitality (39K), and temporary help (14K). Moreover, job growth slowed in the well-paying construction and finance sectors, while the information sector lost positions.

Huge housing hurdles remain

And it’s no wonder construction-job growth shrank: “The one constituency housing needs most is the one struggling the hardest in the jobs market,” CNBC reported. “Employment among those age 25-34 fell in May to 75.3%; this compares to pre-recession rates of 78 to 80% employment.” Those numbers bode ill for first-time homebuyers, who “have been markedly absent from the housing recovery,” comprising just 29% of existing homebuyers in April, versus a 40% historical share.

Despite a jobs report that met expectations, gold has remained largely rangebound. Why? Because of the stock market, which continues to hit new all-time highs. Nevertheless, the bigger story for gold investors is the ECB, which has raised the stakes in the global currency wars, in which central banks devalue their own currencies in a race to stimulate trade and growth. Europeans, particularly the Germans with their still-painful memories of Weimar Republic hyperinflation, will be flooding into gold for safety. Holders of fiat currencies around the world should consider seeking safety as well.

The June 17-18 Federal Reserve meeting is the next big potential catalyst for gold. The hawks on the Fed, such as Esther George and Richard Fisher, want to raise rates soon, which would be bad for gold. The doves, such as Narayana Kocherlakota, think the economy remains too weak and therefore rates should stay low. Low rates favor gold prices. Stay tuned.