Will US Labor Market Recovery Sink Gold? / Commodities / Gold & Silver 2020

The recentjob report is not reliable, but it shows recovery in the US labor market. Thesituation is still bad, but optimism could triumph for now, which is bad forgold.  

On Friday,the Bureau of Labor Services released the newest edition ofthe Employment Situation Report. The publication shows that the US economy regained 2.5 million jobs inMay, constituting the biggest nonfarm payroll surprise inhistory. Indeed, the economists polled by MarketWatch had forecast a loss of7.25 million jobs. The rebound is presented in the chart below.

Meanwhile, theanalysts expected that the unemployment rate would rise to19 percent from 14.7 percent in April, but it declined to 13.3 percent, as onecan see in the next chart. The report, if reliable, signals that the postpandemicrecovery has begun, as the charts below show.

Notsurprisingly, the stock market reacted euphorically, with the S&P 500 Index jumping morethan 2.5 percent on Friday, while the price of gold dropped below $1,700.

But is thesituation in the US labor market indeed so rosy? Not quite. After all, even if the data reported by the BLS isreliable, the number of working Americans is about 20 million lower than beforethe pandemic, and the unemployment rate is still at the highest level since the Great Depression. So, there isstill a long way to go until the labor market returns to normalcy.

But it’s noteven the case that the recovery has really begun. You see, the report is notreliable. And the BLS admitted itself, writing that

If the workers who were recorded asemployed but absent from work due to “other reasons” (over and above the numberabsent for other reasons in a typical May) had been classified as unemployed ontemporary layoff, the overall unemployment rate would have been about 3percentage points higher than reported.

In plainEnglish, it means that the BLS incorrectly described the job status of millionsof people and without such an error, theunemployment rate would be not 13.3 percent, but 16.3 percent. So insteadof decreasing – suggesting the start of the recovery – it would rise furthersince April.

The ADPreport released earlier in the week, based on data directly from theemployers themselves, showed almost 3 million more lost jobs, not a gain injobs. The number was also better than forecasts, but significantly worse thanthe BLS data.

Initialclaims also do not indicate the rebound in the US labor market. As the chartbelow shows, each week since the outbreak of the pandemic, a few millions ofAmericans applied for the unemployment benefits – and more than 42 million intotal wanted to become unemployed, implying a bleaker situation in the US labormarket.

Implications for Gold

What does the recentEmployment Situation Report imply for the gold market? The headlines are verypositive, implying that the recovery started earlier than expected. It shouldspur more optimism among investors, which could further fuel the rally in thestock market, while weakening the safe-haven demand for gold.

However, the BLSdata is not completely reliable and the real unemployment rate likely exceeds16 percent. The government wrongly classified millions of people as “employedbut not at work” instead of “unemployed on temporary layoff”. Hence, the labormarket is still in a terrible spot, so investors should remain cautious. 

In the short run,the optimistic narrative could triumph in the marketplace. After all, thereopening of state economies in May should start the economic recovery. But wewill see what the more distant future will bring. The second wave of infectionsis still possible and after all these riots in the US make it even moreprobable. Nevertheless, the risk appetite should strengthen now with thepositive (although partially fake) job report, which is bad news for the gold market. 

Thank you.

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Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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