Record-Low Unemployment And Trump’s Message To China: Implications For Gold

The US unemployment rate dropped in April to 3.6 percent, a level not seen since December 1969. So, everything must be great. With the exception of the renewed worries about the U.S.-China trade deal. On Sunday, President Trump surprised the markets again. What did he write exactly and how could his tweets affect the gold market? 

US Economy Adds More Than 250,000 new jobs in April

America created 263,000 jobs last month, following a strong rise of 189,000 in March (after an downward revision). The number surprised again on a positive side, as the economists polled by the MarketWatch forecasted 213,000 created jobs.

Moreover, the strong headline number was accompanied by generally positive revisions in March and February. Counting these, employment gains in these two months combined were 16,000 higher than previously reported. Consequently, job gains have averaged 169,000 per month after revision over the last three months, which is lower than several months ago. So, the pace of hiring has slowed, but it should not be surprising at this stage of the business cycle. What is important is that it remains at a healthy level, as the chart below shows.

_{Chart 1: Monthly changes in employment gains (red bars, left axis, in thousands of persons) and unemployment rate (green line, right axis, U-3, %) from April 2014 to April 2019.}

What is more, the chart above shows that the unemployment rate declined in April from 3.8 to 3.6 percent, the lowest number since December 1969. Hence, the newest edition of the Employment Situation Report indicates that the current economic expansion still has plenty of room to run despite growing worries about the slowdown or even an upcoming recession. It is not a good news for gold bulls.

However, investors should take the news about the drop in the unemployment rate with a pinch of salt, as it partially resulted from nearly a half-million workers dropping out of the labor force. The labor force participation rate declined from 63 to 62.8 percent in April. And the increase in pay in the past 12 months was unchanged at 3.2 percent, which means that the strong job gains did not accelerate the increase in wages. Overall, the US labor market remains solid, which supports the current economic expansion, whether gold investors like it or not.

Indeed, the unemployment rate is often a leading indicator of the business cycle. We mean here that the unemployment rate tends to reach a trough several months before a recession. But it is still declining! It means that the recent yield curve inversion,(which is already gone) has not been confirmed by the second most important recession indicator.  Of course, the unemployment rate can bottom out soon, but even if it does, the economic crisis should not come this year, to the despair of gold bulls.

Trump Strikes Back on Twitter

Unless, of course, Trump’s tweets trigger the new financial turmoil. On Sunday, President wrote that that talks with China about trade deal continue but too slowly. So, Trump announced that he would increase tariffs on $200 billion of Chinese imports on Friday from 10 to 25 percent. He also suggested extending a new 25 percent duty on another $325 billion of imports not already covered.

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

That is a radical shift from previous rhetoric. The administration, including Trump himself, have been sending signals that the agreement was close. This about-face raises worry how close we really are and could send the stock market lower. After all, a deal with China has already been essentially priced in. 

What does it imply for the gold market? Well, the renewed uncertainty about the trade policy can increase the safe-haven demand for gold in the short-term. However, investors should remember that the trade wars have been positive for the greenback, the main competitor of the yellow metal. And we cannot exclude that the recent Trump’s tweets were just a negotiating tactic ahead of a new round of talks this week. We will see how China responds – stay tuned!

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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