The price of gold and silver have seen a nice jump today of approximately 1% and 1.5%, respectively, following March’s jobs report of 192,000 non-farm jobs created during the month. The consensus called for 200,000 new jobs created during the month; however, many economists predicted higher numbers than the consensus, as it is believed that the harsh weather experienced in the first two months of the year affected hiring. While we saw an upward revision of 37,000 new jobs for January and February, it doesn’t appear as though weather played as large as a factor in hiring as originally believed.
For those individuals that closely follow the gold and silver markets, the spike we’ve seen today in the precious metals market is expected. When weaker than expected economic data is reported, this is an indication that the FOMC may be withdrawing stimulus at too fast of a clip, causing them to reevaluate their plan. This could result in a suspension of their tapering efforts or a reduction of the timetable that they’re previously shared. Monetary inflation typically bodes well for the precious metals sector. On the other hand, when economic data exceeds expectations, the assumption is that the economy is on stable footing, sending a signal to the Federal Open Market Committee (FOMC) that their tapering efforts have not been detrimental to the economy and that they can stay the course.
Where do we see the price of gold and silver going from here? We believe that the upside far exceeds the downside at current levels. A highly valued stock market, a slowing housing market (as measured by mortgage application demand), an underperforming job market, an historically $59 trillion in credit market debt, and little to no sign of economic restraint by our elected officials will likely lead to continued weakness in the economy, lower than expected GDP growth and continued monetary expansion by the Federal Reserve.
What may be surprising to most of our readers is that for all of the talk of tapering, we’re seeing very little to no sign of a reduction in the Federal Reserve’s monetary base. The follow chart from the St. Louis Fed site clearly shows that the monetary base is still expanding at an upward trajectory:
The above chart displays the expansion of the monetary base from 3/1/13 – 3/1/14 (the most recent data available). Even if the Federal Reserve continues on its path of tapering, the monetary base will be $4.5 trillion by the time that they’re done, which is five times higher than it was where they first began expanding six years ago. While no one wants to talk about the elephant in the room, the fact of the matter is that the Federal Reserve will at some point need to unwind the massive amount of Treasurys and mortgage backed securities that they’ve purchased over the past several years. This will likely only occur if we begin to see higher inflation rates or the dollar falls drastically in the Forex markets.
Of course, an unwinding of the Fed’s asset base will push up interest rates, which will cause a slowdown in the real estate market, a likely sell off in the stock market and high debt servicing fees. With official debt levels of approximately $17.5 trillion, we could see a majority of the tax revenue received by the government used to service debt, which most assuredly would lead to a slowdown in the economy and a reduction of welfare programs.
In light of the above, we believe that it’s wise to hedge yourself with an investment in gold and silver coins. They’re one of the few investment options that don’t have counterparty risk. In other words, there’s no need to rely on other parties regarding the stability of your investment.