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Job Numbers Tell The Story & What's Happening With Gold?

March 12, 2007

This past week we saw an expected bounce in the stock market. But per my last commentary, we are not out of the woods when it comes to this sell-off. I typically have CNBC on in my office, and it never ceases to amaze me the continual assertion by pundits that we are in the midst of a goldilocks economy and that the stock market is undoubtedly going to head higher over the next several months. Whether or not you subscribe with my 20%+ decline in the market, you have to at least understand that we do not have a goldilocks economy.

Friday's job numbers are yet another example of Wall Street simply focusing on the positives and failing to acknowledge the problems that will face us in the future. While the unemployment rate declined from 4.6% to 4.5%, jobs created in February (97,000 jobs) was the lowest increase in 2 years. And even the jobs that were created occurred in primarily the health care and service sector. The service sector jobs, however, often lags behind the economy. For instance, the consumer will continue spending and buying until they no longer can afford to do so (because of job loss, rising interest rates, higher mortgage payments, etc.). When the consumer curbs back on their spending, you will then see job loss in the service sector. If Mr. Jones decides to put off buying a new car because he recently lost 10 % of his stock portfolio, the car salesman will likely not make the additional car sale. In turn, he might not go out to dinner as often or spend money in the local economy. As you can imagine, this will result in a trickle down effect and service sector jobs will likely get slashed.

On the other hand, the jobs that are already getting slashed are those in the housing and manufacturing sector. The recent report showed that construction employment fell by 67,000 jobs and the manufacturing sector (think automobile industry) lost an additional 14,000 jobs. This not only foreshadows a declining real estate market but also an economic contraction in the United States (recession).

Since 2001, more than 40% of the private sector jobs were directly or indirectly a result of this housing bubble (real estate agents, mortgage brokers, construction workers, appraisers, home improvement stores, and many more). This is why the housing market is such a big factor in the future direction of our economy. As I have stated previously, I believe that a housing led recession is more than likely (View My Real Estate/Recession Article From January 2006). Naturally, as the housing market continues its decline, the jobs that were gained will be lost.

Not that this projection is anything new. Take a look at the following chart that shows the correlation of housing prices to employment.



What you will notice about the above chart is that in the past, declining home prices have signaled an increase in the unemployment rate. And of course, this makes perfect and logical sense. Not only will the investor's psyche (once they see falling home prices) translate into less spending, but job loss will weigh heavily on the US economy. Thus, if you want to keep an eye on which direction the economy is heading, focus on the job numbers in the housing and manufacturing industries.

What's Going On With Gold?

What exactly is going on with gold? Several weeks ago I mentioned that gold's decline was fundamentally unwarranted. I continue to believe this is the case. I sent this comment to several reporters earlier this week:

"It seems to me that gold is looking to form a base around the 640 level. The recent decline from the highs has put gold in an oversold position and I would expect any type of stability in the global marketplace to spur an onslaught of fresh buying, especially out of Asia. Investors that blink might be surprised to see the price of gold back at last month's highs within a relatively short period of time. In light of continued inflationary pressures, a weak US dollar, and geopolitical tensions the decline of gold was fundamentally unwarranted.

Additionally, there has also been a lot of talk regarding gold not acting as a safe haven. And while the decline in gold prices alongside a declining stock market might initially trigger this thought, investors should not forget the longer-term historical significance. Throughout history, gold has acted as a safe haven in times of political and economic stability. It has served as a hedge against rising inflation, and it has preserved wealth for thousands of years. These ideas are not easily erased in one week. Gold as a safe haven is branded on the minds of investors across the globe. Investors should see the recent sell-off in gold as a buying opportunity. The longer-term bullish fundamentals are still in tact and prudent allocation to this market is justified."

In a couple short weeks, the price of gold went from an overbought situation to an oversold situation. One of the indicators that I use to determine whether a market is overbought or oversold is the relative strength index or RSI. Take a look on the daily chart on April Gold futures contract.

As you can see from the above chart, whenever the RSI has moved towards an extreme oversold position, gold has responded with a rally. However, it is important to note that this is just one indicator. Also, there can be situations where a market which is oversold can continue to be oversold. My outlook, however, is that gold's oversold position coupled with the above mentioned fundamental bullish factors, will likely result in a sharp move up within the next week or so.

Emanuel Balarie

Senior Market Strategist
Wisdom Financial, Inc.


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The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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