Perhaps the lesson is this: Don't count gold out.
Last week, I was expecting another thrust downward for gold, with the metal losing perhaps another $35–$60 to the $1,150–$1,175 range.
Instead, the metal soared $32 on Friday, thanks to the stunning miss on the May nonfarm payrolls report.
Against the consensus expectation of 158,000 jobs being created in May, the report showed just 38,000 jobs—a shocking miss to the downside.
Rubbing salt in the wound was the fact that revisions to the April and March reports slashed another 59,000 jobs. The three-month average thus fell to just 116,000, a major deceleration from the monthly average of 219,000 jobs for the previous 12 months.
The headline unemployment rate fell to 4.7% from 5.0%, but that was solely due to 458,000 people leaving the workforce.
A 180° Turn in Expectations
Prior to Friday's jobs number, the market had finally begun to believe the Federal Reserve governors who had been universally pleading that, "Really. . .this time we mean it. We're going to hike rates this month or the next."
While the odds of a June rate hike were still rather low at around 21% as judged by Fed fund futures, those odds immediately collapsed to only around 4% after the release of the May jobs number.
The odds of a July hike similarly collapsed, from 64% to just below 30%.
In other words, investor expectations made a 180° turn, from Fed tightening to, potentially, monetary accommodation if the employment data continue to point toward an economic slowdown.
I had been guilty of buying into the idea that the Fed was going to tighten soon. While the economic data had been mixed, the FOMC desperately wanted to get some breathing room above zero, and the impending election would soon close the window of opportunity to raise rates.
Still, while I expected rate hikes, I warned my subscribers that gold "has proven naysayers wrong time and again this year. I wouldn't be surprised to see it rebound from here."
My point is that gold has been performing in a bull-market manner. Instead of looking for excuses to sell the metal as we saw from 2011–2014, investors are interpreting new developments as reasons to buy gold.
And it's hard to imagine a piece of news more dramatically bullish for gold than the disastrous May jobs number.
Where we once thought the Fed would be tightening, it's now obvious that we are in a dramatically new environment. . .for investors, a new world entirely. . .than that of last week.
There is, of course, the chance that the May payrolls report is an outlier, and many have pointed to last month's Verizon strike as being a one-time mitigating factor. But 38,000 jobs was such a massive miss, even accounting for the Verizon situation, that it seems almost certainly indicative of serious employment weakness.
Add in the downside revisions for the prior two months, and the argument for at least some sector-based recessions in the U.S. economy seems very convincing.
Yes, a different world than that of last week, when a Fed rate hike was looming over the markets, gold bugs expected the metal to lose another $50 or so, and we were eagerly awaiting a clearance sale on gold and silver companies with established resources.
If the new perception indeed represents the reality of the U.S. economy—and I think it does—then we'll need to start looking further down the food chain, into the drill plays, for the greatest upside potential.
One would expect that a move like last Friday's would need some time to consolidate, and even a small correction would not be surprising.
That said, the decline in job creation, as marked by not only the May number but also the downward revisions to the previous two months, completely changes the outlook for the U.S. economy going forward.
It's a different world than what we were expecting just last week, and we need to be ready for it by owning gold, silver and well-positioned junior mining/exploration stocks.
Brien Lundin is the publisher of Gold Newsletter, the world's oldest precious metals advisory, and the producer of the New Orleans Investment Conference, now in its 42nd year.
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