Jobless claims paint a much grimmer picture than other pieces of economic data. So, the Fed (and other central banks) will remain dovish for years, which should support gold prices.

More and more economic reports show the beginning of the economic recovery in the U.S. Following the retail sales earlier last week, the Philly Fed Manufacturing Index turned from negative 43.1 in May to positive 27.5 in June, the first positive reading since February. And the Leading Economic Index rose 2.8 percent in May, after a record plunge in the two prior months.

However, the initial jobless claims paint a much grimmer picture. They amounted to 1.5 million in the week from June 6 to June 13, as the chart below shows. While the number of Americans who applied for unemployment benefits has been systematically declining since late March, the number of people who applied for receiving jobless benefits barely fell from 1.56 million in the previous week.

Indeed, although initial claims are slowly falling back toward a pre-pandemic normal level, it is taking an agonizingly long time. Despite the surprisingly positive May nonfarm payrolls, the initial claims suggest that there is no quick recovery in the U.S. labor market.

The continuing claims, which count the number of people who have already filed for initial claims and who have experienced a week of unemployment, and then filed a continued claim for benefits for that week of unemployment, also show a frustratingly slow rebound in the U.S. employment. As one can see in the chart below, the number peaked at nearly 25 million in May, barely declining to 20.5 last week.

The potential explanation is that there is the second wave of layoffs, which keeps the number elevated, hampering the pace of economic recovery. Hence, investors should take with a pinch of salt the unemployment rate having fallen to 13.3 percent in May to reflect the true state of the U.S. labor market. Reality is much worse - which is actually good news for the gold market.

Central Banks and Gold

On Wednesday, Powell testified for the second straight day to Congress. He reiterated his previously stated views - in particular, Powell reemphasized that the Fed will not hike interest rates for years: "We're thinking that this economy is going to need support from monetary policy for an extended period of time," he said.

It seems that the American central bankers are not worried about the potential inflation at all. In a recent speech at the Foreign Policy Association in New York, Richard Clarida, Fed Vice Chair, said that the coronavirus crisis will be disinflationary, not inflationary:

while the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term. If so, downward pressure on PCE (personal consumption expenditures) inflation, which was already running somewhat below our 2 percent objective when the downturn began in March, will continue.

Given Clarida's prominence, it seems that the Fed will be indeed very dovish for years, which should support the gold prices.

But not only the Fed. In June, the ECB expanded its emergency program in size and duration. The Pandemic Emergency Purchase Program will be increased by €600 billion to a total of €1,350 billion and it will be extended until at least the end of June 2021. Similarly, the Bank of Japan increased the nominal size of its aid for businesses struggling because of the pandemic from about $700 billion to $1 trillion.

Implications for Gold

What does it all mean for the gold market? The low inflation and still very harsh situation in the U.S. labor market imply that the Fed will remain very accommodative for years to come. The same applies to the Bank of Japan and the ECB. The rising central banks' balance sheets and the ZIRP should support gold prices. However, the flush of liquidity may also boost risky assets, while the dovish ECB's monetary policy could weaken the euro and gold against the U.S. dollar.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

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Retail sales came in really strong in May, which could strengthen risk appetite, but the dovish Fed should support gold.

As the chart below shows, retail sales surged 17.7 percent in May, as the U.S. economy started to reopen. The number was a record high and above expectations, triggering optimism in the marketplace.

However, the sales were still 6 percent lower than a year ago, which means that the coronavirus crisis has not ended yet. But such reports may, nevertheless, increase the risk appetite among investors at the expense gold and other safe havens.

Another sign that the US economy began to revive in May, was the increase in industrial production by 1.4 percent, as many factories resumed operations. However, the number came below expectations, and the industrial production was still 15.4 percent below its pre-pandemic level, as one can see in the chart below.

Powell's Testimony and Gold

On Tuesday, Powell testified before the Senate Banking Committee. His prepared testimony was not much different than from his earlier remarks during the press conference after the June FOMC meeting. Powell reiterated his cautious view about the economic outlook and that he does not expect a V-shaped recovery:

the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery. Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely. Moreover, the longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures.

Therefore, according to Powell, investors should not overreact to surprisingly good economic data such as the May nonfarm payrolls or retail sales report. He said that the economy would go through three stages: economic shutdown, the bounce-back as people return to work and the economy "well short" of the pre-pandemic level in February. In other words, we are at the beginning of rebound, and many economic reports may be very positive, but it should not be actually surprising as they are coming off extremely low levels. What is crucial here is how will the economy evolve later.

The new thing Powell said was admission that the latest Fed's dot plot does not factor in a potential second wave of coronavirus infections later this year, which is rather concerning. When asked by Senator Krysten Sinema whether "Does this projection assume a potential second wave of coronavirus and the accompanying economic impacts?", Powell replied:

I would think the answer to your question, though, largely will be that ... my colleagues will not principally have assumed that there will be a substantial second wave.

It means that the potential resurgence of coronavirus in the second half of the year would alter the Fed's stance into being even more dovish, which could be positive for gold prices.

Implications for Gold

What does it all mean for the gold market? In his testimony, Powell reemphasized that the Fed will be very accommodative for a long period of time, with potentially being even more dovish if the second wave of infections occur. The U.S. central bank is not concerned about inflation, but about lack of growth and unemployment rate. Although the upcoming economic data could be very positive due to the very low base, investors should not overreact and remember that there is still long way to recovery.

This is, however, what they should do. But they don't. The market is ignoring the bad news and focusing on the positives. After all, things turned out to be not so apocalyptic as the initial March assessment suggested. Moreover, the interest rates and bond yields are ultra low, while the Fed stands ready to intervene, which increases market confidence. The optimism among investors is a bad things for gold prices, but negative real interest rates and very accommodative central bank should support the yellow metal, as the chart below shows.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

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Inflation remains low, while Powell signals dovish Fed for years. Good for gold.

The US CPI inflation rate declined 0.1 percent in May, following a 0.8 percent drop in April. The decrease was mainly driven by decreases in energy, transportation and apparel prices. The core CPI also declined 0.1 percent, following a 0.4 percent drop in April. It was the third consecutive monthly decline, which happened for the first time in history of the index that starts in 1957. Anyway, compared with the previous month, we see some stabilization of disinflation forces, at least on a monthly basis.

On annual basis, the overall CPI increased just 0.2 percent (seasonally adjusted and merely 0.1 percent without the seasonal adjustments), following 0.4 percent increase in April. It was the smallest 12-month increase since October 2015. The core CPI rose 1.2 percent over the last 12 months, compared to the 1.4 percent increase in the previous month. It was the smallest increase since March 2011. Both indices are substantially lower than a few months ago. The chart below shows these disinflationary trends.

The softening inflation could theoretically reduce the demand for inflationary hedges, but it also means that the Fed will remain dovish for years, which should support gold prices overall.

Powell's Press Conference and Gold

In last edition of the Fundamental Gold Report, I mentioned the last Powell's press conference, but I would like to point out a few more things. First, he said that the Fed is considering to target the yield curve, similarly to the Bank of Japan. If adopted, such policy should imply ultra low interest rates for longer, supporting the gold prices.

Second, Powell signaled also that the interest rates will remain low at least until the unemployment rate will not return to normal:

So, I think we have to be humble about our ability to move inflation up, and particularly when unemployment is -- is going to be above most estimates of the natural rate for -- certainly above the median in our -- in our -- in our SEP, well through the end of -- past the end of 2022.

It means that even if inflation goes up, the Fed will not react in a hawkish manner as long as unemployment rate is below the natural rate of unemployment. Given that inflation has recently declined, the Fed's dovish bias is almost certain. And what is important here is that Powell expects a significant slack in the labor market. In other words, the coronavirus crisis will lead to permanent job losses:

My assumption is that there will be a significant chunk -- chunk, well into the millions. I -- I don't want to give you a number because it's going to be a guess, but well, well into the millions of people who -- who don't get to go back to their old job and in fact, there isn't a -- there may not be a job in that industry for them for some time. There will eventually be, but it could be some years before we get back to those people finding jobs

Third, Powell is worried about the second wave of coronavirus cases. He believes that it might be another factor behind the gradual recovery, not necessarily a V-shaped one:

I think, that if a -- if it happens -- you know, the -- the issue would be, first of all, people's health, but secondly, you could see a public loss of confidence in -- in parts of the economy that will be already slow to recover, so it could hurt the recovery, even if you don't have a national level pandemic, just a -- just a series of -- of local ones -- of local spikes could -- could have the effect of undermining people's confidence in traveling, in restaurants, and entertainment, anything that involves getting people together in small groups, and feeding them, or flying them around, those things could be hurt. So, it would not be a positive development, and I'll just leave it at that.

And Powell might be right. As the chart below shows, the number of the US daily cases have been rising recently, probably due to massive riots on American streets.

Implications for Gold

What does it all mean for the gold market? The recent Powell's press conference indicating that there is still a long way to recovery was a cold water for many stock market investors (but not for our Readers, as we have been warning for many weeks that the investors' optimism about the V-shaped recovery may be not really founded in reality). People also started to worry that new virus infections could stunt the pace of the economic recovery. In consequence, both the Dow Jones and S&P 500 indexes suffered their biggest weekly percentage declines since March. The weaker risk appetite should be positive for safe-haven assets such as gold. Moreover, lower inflation with uncertain recovery imply a dovish Fed and the ZIRP to stay with us for years, which - from the fundamental point of view - should also support the gold prices.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

• Read more

Yesterday, the Fed issued the statement from the FOMC meeting on June 9-10. The statement is little changed from the April edition. Nevertheless, there are two important differences. First, the members of the Committee have acknowledged the improvement in the economic situation since April, as they wrote that "financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses." Moreover, according to new wording, the virus and the measures taken to protect public health "have induced" (instead of "are inducing" in April) sharp declines in economic activity and a surge in job losses.

Second, the Fed used a subtle forward guidance, reassuring the market participants that the quantitative easing will not end or even be tampered with anytime soon. Perhaps to avoid taper tantrum, the FOMC wrote:

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

What does it mean for the gold market? On the one hand, the Fed's balance sheet is already massive, as the chart below shows. Indeed, the US central bank's assets have surpassed $7 trillion in May and they are expected to rise even to around $10 trillion because of the coronavirus crisis. So, the Fed's intention to increase it at least at the current pace should raise it even more, spurring worries about the unconventional monetary policy and possibly support gold prices.

On the other hand, the Fed's forward guidance and end of steady tapering of asset purchases could reassure the Wall Street that the party of easy money and unlimited liquidity is going to last. The tap with cheap money will not be turned off anytime soon, or it can be even unscrewed wider - so, the FOMC statement could support risk appetite and risky assets at the expense of safe-haven assets such as gold. However, it seems that positive impact triumphed as gold prices rose yesterday amid the dovish FOMC statement, as the chart below shows.

June FOMC Projections and Gold

The FOMC issued yesterday not only the statement of its monetary policy, but also its fresh economic projections. Not surprisingly, all projections are much more pessimistic compared to December. The GDP growth and inflation will be lower, while the unemployment rate higher, as the table below shows.

For example, the FOMC expects that the GDP will decrease 6.5 percent in 2020, increase 5 percent in 2021 and 3.5 percent in 2022, compared to positive 2 percent, 1.9 percent and 1.8 percent expected in December. What is important here, is that although the Fed sees recovery next year (which is normal, given the low base in 2020), the projections do not paint the V-shaped recovery, as the GDP will return to its pre-pandemic level only in 2022. As Powell said during his press conference "We all want to get back to normal, but a full recovery is unlikely to occur until people are confident that it is safe to reengage in a broad range of activities." This is rather good news for gold.

The unemployment rate is expected to be 9.3 percent in 2020, 6.5 percent next year and 5.5 percent in 2021, versus 3.5-3.7 percent range seen in December projections. These are also quite positive projections for gold prices, as the unemployment rate is not expected to even return to its pre-pandemic level.

When it comes to PCE inflation, the FOMC sees muted inflation in 2020 (0.8 percent rate instead of 1.9 percent projected in December), and rebound in next years to 1.6 and 1.7 percent (versus 2 percent in both years forecasted in December). Lower inflation rates could reduce the demand for gold as an inflation hedge. However, the FOMC projects that inflation rates will be below its target, which will provide an excellent excuse for continuation of its dovish monetary policy, thus supporting gold prices.

Last but not least, the Fed sees its federal funds rate to remain near zero at least until 2022. As Powell said during the press conference "We're not even thinking about raising rates," Fed Chairman Jerome Powell told reporters." This is also good news for gold from the fundamental point of view, which thrives under ZIRP and very low real interest rates.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

• Read more

The recent job report is not reliable, but it shows recovery in the US labor market. The situation is still bad, but optimism could triumph for now, which is bad for gold.

On Friday, the Bureau of Labor Services released the newest edition of the Employment Situation Report. The publication shows that the US economy regained 2.5 million jobs in May, constituting the biggest nonfarm payroll surprise in history. Indeed, the economists polled by MarketWatch had forecast a loss of 7.25 million jobs. The rebound is presented in the chart below.

Meanwhile, the analysts expected that the unemployment rate would rise to 19 percent from 14.7 percent in April, but it declined to 13.3 percent, as one can see in the next chart. The report, if reliable, signals that the postpandemic recovery has begun, as the charts below show.

Not surprisingly, the stock market reacted euphorically, with the S&P 500 Index jumping more than 2.5 percent on Friday, while the price of gold dropped below $1,700.

But is the situation in the US labor market indeed so rosy? Not quite. After all, even if the data reported by the BLS is reliable, the number of working Americans is about 20 million lower than before the pandemic, and the unemployment rate is still at the highest level since the Great Depression. So, there is still a long way to go until the labor market returns to normalcy.

But it's not even the case that the recovery has really begun. You see, the report is not reliable. And the BLS admitted itself, writing that

If the workers who were recorded as employed but absent from work due to "other reasons" (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported.

In plain English, it means that the BLS incorrectly described the job status of millions of people and without such an error, the unemployment rate would be not 13.3 percent, but 16.3 percent. So instead of decreasing - suggesting the start of the recovery - it would rise further since April.

The ADP report released earlier in the week, based on data directly from the employers themselves, showed almost 3 million more lost jobs, not a gain in jobs. The number was also better than forecasts, but significantly worse than the BLS data.

Initial claims also do not indicate the rebound in the US labor market. As the chart below shows, each week since the outbreak of the pandemic, a few millions of Americans applied for the unemployment benefits - and more than 42 million in total wanted to become unemployed, implying a bleaker situation in the US labor market.

Implications for Gold

What does the recent Employment Situation Report imply for the gold market? The headlines are very positive, implying that the recovery started earlier than expected. It should spur more optimism among investors, which could further fuel the rally in the stock market, while weakening the safe-haven demand for gold.

However, the BLS data is not completely reliable and the real unemployment rate likely exceeds 16 percent. The government wrongly classified millions of people as "employed but not at work" instead of "unemployed on temporary layoff". Hence, the labor market is still in a terrible spot, so investors should remain cautious.

In the short run, the optimistic narrative could triumph in the marketplace. After all, the reopening of state economies in May should start the economic recovery. But we will see what the more distant future will bring. The second wave of infections is still possible and after all these riots in the US make it even more probable. Nevertheless, the risk appetite should strengthen now with the positive (although partially fake) job report, which is bad news for the gold market.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

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 Gold & Silver Trading Alerts.

• Read more