The unexpectedly bad jobs report … the 10-year yield keeps rising … the support level gold investors need to be watching
Well, that was disappointing.
Last Friday, we learned that the economy added just 194,000 new jobs in September. Economists polled by The Wall Street Journal had been expected 500,000.
This is the second disappointing month in a row, and marks the fewest jobs created in nine months.
This miss is causing some investors to wonder if it will delay the timing of when the Fed begins to slow its bond-purchasing program. Just about everyone had been expecting next month.
Whether or not that happens, it’s likely that the poor jobs report will cause the Fed to think twice about any tightening policy.
For more color on the report, here’s our hypergrowth expert, Luke Lango, from his Early Stage Investor Daily Notes on Friday:
The news is particularly puzzling because it comes on the heels of falling weekly jobless claims and a strong ADP Employment Report on Wednesday.
It was a shockingly bad jobs report.
Yet, in response to the bad jobs report, the 10-year Treasury yield powered higher, mostly because the jobs report did have hints of inflation with a better-than-expected 0.6% rise in average hourly earnings.
And, unlike (Thursday), stocks mostly dropped as yields powered higher.
***This underscores an important point to remember about rising yields
Rising yields don’t automatically mean stocks will drop. What matters most for stock performance is what’s driving the increase in yields.
Back to Luke on this point:
Zooming out, there are two big yield drivers: economic growth and inflation.
When yields move higher because of the former, that’s a healthy rise in yields, and stocks power higher.
When yields move higher because of the latter, that’s an unhealthy rise in yields, and stocks drop.
(Last Thursday) was a healthy rise in yields. (Last Friday) was an unhealthy rise in yields.
If we pull out bigger picture, Luke believes that today’s stock volatility is largely because the bond market is driving the stock market. Stocks need clarification on Fed policy, as well as evidence that inflation is easing.
Right now, we don’t have either. The jobs miss on Friday brings into question the timing of the Fed tapering. And we don’t have conclusive data suggesting inflation is ebbing.
However, here’s Luke on what will happen when those conditions are met:
The bond market will calm down, and the stock market will start operating with independence again – meaning the focus will return to earnings and fundamentals…
All in all, we can’t wait for the stock market to stop taking cues from the bond market.
In the meantime, expect more volatility.
***Meanwhile, gold continues to snooze, and is dangerously close to a key support level
Despite jarring inflation numbers over the last several quarters, gold continues to be comatose.
Since hitting a high in August 2020, the precious metal has dropped roughly 15%. And if its price doesn’t hold a key support level, additional losses could come fast.
Below, we look at gold’s three-year chart. I’ve added its long-term support line, which is roughly $1,700.
As I write Monday, gold is trading about 3% above this level.
Now, there are two worrisome dynamics that make this 3% spread feel a little too thin for comfort.
First, look below at the same chart, but this time we’ve included two long-term trend lines. What you’re seeing is a compressing wedge-pattern.
As we’ve noted before here in the Digest, a study of market history shows that assets often make strong moves after going through periods of compressed price action.
Most recently, we called attention to a wedge pattern in gold back in early August – though that wedge covered a shorter time-horizon.
We were right about gold breaking out of that wedge with a strong move – unfortunately, we were wrong about the direction. Gold fell through the support level we’d identified (though quickly bounced back…then fell again).
When looking at the longer-term wedge pattern above, we expect a similar strong move out of this wedge. Unfortunately, given that the dominate price trend since summer 2020 is “down,” it suggests the direction of the wedge-break will be south.
If you look back to our first chart, you’ll see that if gold falls below $1,700, there’s a lot of room to drop before finding new support.
***The second worrisome detail in all of this is the strengthening dollar
In the long run, we’re concerned for the dollar given the trillions of dollars our government has blasted into the economy.
However, in the shorter-term, the dollar has upward momentum – and that’s bad for gold.
Here’s our macro specialist and the editor of Investment Report, Eric Fry:
Although it is impossible to cite a specific reason why the gold price has been drifting lower, the dollar’s recent uptrend is certainly part of the reason.
After bottoming out at 89.20 on Jan. 6, the Dollar Index has advanced nearly 5%.
That’s a big move in the world of currencies. And since gold tends to move inversely with the dollar, the greenback’s recent winning ways have produced losing ways for the gold market.
As Eric just noted, gold and the dollar tend to have an inverse relationship. When one increases in value, the other usually decreases.
You can see this dynamic play out in the chart below. It compares gold and the dollar over the last 16 months.
The price of gold is in black, on the top part of the chart. The value of the U.S. dollar is in green, on the bottom part of the chart.
Notice how they tend to move opposite of one another.
Below, we look at the dollar over the last two-an-a-half years.
You can see it double-bottoming this year. And since May, it’s largely been showing strength or consolidation.
Most recently, it broke out of its summer trading range between 92 and 93.
Bottom-line, the dollar is showing bullish technical action right now. Translation – bad for gold.
One thing to point out, however, is gold’s prospects usually turn around when it appears all hope is lost.
The yellow metal is barely registering a pulse at the moment. Most of the wax figures inside Madame Tussauds museum seem more vibrant and lifelike.
But that’s simply how gold behaves from time to time. It “does nothing” for such extended periods of time that investors begin to doubt it could fog a mirror.
Gradually, they turn their back on the comatose metal and leave it for dead. But that’s usually about the time it comes to life.
Though we agree with Eric, we’re hard-pressed to find an immediate catalyst that will help gold’s price in the immediate future – though we hope to be proven wrong.
Bottom-line, keep your eye on $1,700. If gold fails to hold this price-level, watch out below.
We’ll continue to keep you updated here in the Digest.
Have a good evening,