Stronger than expected job growth sends gold down--here's the logic

11/02/2012 5:01 pm EST


Jim Jubak

Founder and Editor,

Jobs numbers for October better than expected. Gold down. That’s not the normal reaction in the price of gold to better than expected growth. Normally, gold would rise on inflation fears if the economy were growing faster than expected.

I think I understand the market reaction. See if this makes sense to you.

In October the economy added 171,000 net jobs. That was up from a revised 148,000 in September. (The September figure was initially reported as 114,000.) The consensus among economists surveyed by called for an increase of 125,000 in September.

The unemployment rate rose slightly to 7.9% from 7.8% in September as 578,000 people entered the labor force. (Which is what drove the unemployment rate up.) The labor force participation rate went to 63.8% from 63.6%. The gain in jobs came from people finding full-time jobs: Part-time employment fell by 269,000.

You might think that this picture—the economy growing slowly but faster than expected—would raise fears of inflation. That would hurt the dollar—since inflation would make the dollar less valuable—and push up the price of gold—which is a store of value in inflationary times.

But the market’s reaction to these numbers shows that there is no fear of inflation—with unemployment at 7.9% I think that’s a reasonable conclusion.

Instead the market seems to have focused on the possibility that better than expected growth might cause the Federal Reserve to end its current program of quantitative easing earlier than expected and revise its promise to keep interest rates at currently low levels through the middle of 2015.

I think the market is prematurely fretting over this worry. An unemployment rate of 7.9% isn’t going to produce a shift in Fed policy anytime soon.

Gold finished down 2.2% on the COMEX today. Silver fell 4.2%.

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