The gold market dropped nearly $20 an ounce shortly after the U.S. Non-farm
Payroll report was released on Friday. The Labor Department reported that the
unemployment rate dropped to 7.8%, from 8.1% in the month prior. Gold prices
retreated on the fear that the Fed may decide to truncate its debt monetization
schemes in the near future.
However, after digging a bit into the report investors in the yellow metal
should find those fears without grounds. Friday's figures revealed that the
underemployment rate--which includes those part-timers who would prefer a full-time
position and also those people who desire to work but have given up looking
- remained unchanged at 14.7%. In addition, only 114k jobs were added in the
establishment survey; and the all-important manufacturing sector of the economy
actually lost 16k jobs.
Not only was the actual data from the BLS not very impressive but the Fed
is on record saying that the U.S. economy needs to experience a prolonged period
of time where 250k jobs are added each month before the Fed would consider
changing its monetary policy stance.
Rather than looking to take a step backwards; the Fed is hatching plans for
QE IV, which will be an additional $45 of Mortgage Backed Securities and Treasury
purchases beginning in January.
In fact, investors around the world are being forced into buying precious
metals; and should consider holding sovereign debt the world's worst investment.
European Central Bank President Mario Draghi said on Thursday the institution
was ready to fire its bazooka and begin purchasing bonds. Mr. Draghi said the
ECB's bond-buying plan has already "helped to alleviate tensions over the past
few weeks." And proclaimed the era of Outright Monetary Transactions in sovereign
bond markets aimed "at safeguarding an appropriate monetary policy transmission
and the singleness of the monetary policy" is about to begin.
Japanese investors are in the same sinking vessel as Europeans and Americans.
Last Friday, the BOJ's policy board decided to maintain the size of its asset-purchase
program, its main tool for monetary easing, at ¥80 trillion ($1.02 trillion)
following a two-day meeting.
The meeting featured the unusual attendance of Japan's newly appointed economy
minister, Seiji Maehara, on the second day of the session. He said, "I have
a sense of crisis about the continued strength of the yen and Japan's inability
to overcome deflation. I wanted to express this feeling through my attendance
at the policy board meeting,"
With people like that in charge of your currency's purchasing power, investors
in Yen denominated assets should cringe. Long notorious for urging the BOJ
to take aggressive action against deflation, Mr. Maehara has said recently
that the central bank should consider buying foreign bonds as a means of injecting
more liquidity into the economy to help tackle falling prices. What Japan's
economic minister is actually suggesting is that the BOJ not only dramatically
increase the supply of Yen, but also directly manipulate the currency's value
much lower by selling Yen and buying foreign currencies for the purpose of
holding non-domestic debt.
Therefore, are the citizens of the United States, Europe and Japan encouraged
to park their savings in sovereign debt while their central banks are the only
buyers and the real rate of return is negative and falling?
There is a tremendous bubble being created in the fixed income markets of
the developed world. Real interest rates are headed much further south and
the value of those currencies is declining against other countries that display
better monetary discipline.
Investors must own precious metals when nearly every other "risk-free" sovereign
investment offers a negative return after adjusting for inflation. Since the
bond market virtually guarantees investors will be a loser from the start,
placing money in hard assets, which have a long history of keeping pace with
inflation, is an easy choice.
