Weak non farm payrolls boost gold

US nonfarm payrolls grew less than anticipated during August and so paving the way for the Federal Reserve to implement QE3, investors believe. Economists polled by Reuters and Bloomberg were expecting a rise of 125k in payrolls but the number came short at 96k, showing a persistent weakness in the job market. The unemployment rate did fall from 8.3% to 8.1% but the main reason is not exactly job creation but rather people abandoning the job market after many months of looking without success.

Investors have been anxiously waiting for this report as they thought a worse than expected number could be the trigger for QE3 with Ben Bernanke has been stating his concerns about a frustratingly slow growth in the job market for some months now.

The chart below shows the evolution of nonfarm payrolls since 2002. We can easily identify the effects of the recession in the job market between February 2008 and February 2010. Payrolls decreased for 25 straight months. Since that date the job market recovered but less than half of those that have been lost. If we compare the unemployment rate with August last year, it has recovered one full point from 9.1% to 8.1%, and since October 2010, payrolls have been positive for 23 straight months, with the US economy creating on average 148k jobs per month. Still an unemployment rate of over 8%, even one artificially depressed due to the reduction in labour market participation is still to high, certainly for Mr Obama who is bidding for re-election in 2 months time…

In order for the US economy to be able to bring down the unemployment rate, payrolls need to increase at the rate of 200k per month. Since October 2010, the growth rate has been weaker than that. It is also difficult to justify a full quantitative easing program to propel the job market at this point. It seems that the US job market is in need of some easing but on the fiscal side. The next US government will have to deal with the fiscal cliff we have covered on this blog and will also likely prolong some tax benefits. The solution may, in fact, not lie with the money supply.

It seems that the market is not viewing things as I am since gold was boosted from $1,695 to $1,737 in less than an hour after the payrolls number was issued. Such an increase is in anticipation of the Fed giving the extra help of quantitative easing next Thursday. If the FED fails to deliver, just guess what will happen to gold…