Unemployment Rate Drops, Should You Sell Gold?

On Friday, the U.S. jobless rate dropped unexpectedly in January to 8.3 percent, the lowest level since February 2009.  According to the Labor Department, the economy added 243,000 jobs.  Furthermore, today’s report includes revisions adding a total of 60,000 jobs to payrolls in November and December. The Labor Department also revised December’s gains to 203,000, from an initially reported 200,000.

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The data comes one week after the Federal Reserve voiced concerns over the economy, but with the unemployment rate falling, doubt has been raised on how much additional easing the Fed will provide.  As a result, gold and silver both declined more than 1 percent in morning trading.  However, a closer look at the unemployment data reveals plenty to be concerned about.  The labor force participation rate, which is the percentage of working-age persons in an economy who are employed or unemployed, dropped to 63.7 percent, its lowest level in 30 years.  A record breaking 1.2 million people dropped out of the available labor pool used in the unemployment calculation.  According to Zero Hedge, using the average long-term labor force participation rate of 65.8 percent, the real unemployment rate actually increased in January to 11.5 percent.  In fact, the spread between the reported and implied unemployment rate just hit a fresh 30 year high of 3.2 percent.

Another concerning data point in the unemployment report is that the number of part-time workers is quickly rising, as many people are having to settle for employment opportunities.  In January, the number of part-time workers surged by almost 700,000, representing the biggest jump on record.  Meanwhile, full-time workers only increased by 80,000.  If the unemployment picture was truly showing a great improvement and no need for further Fed action, gold and silver prices would most likely see a greater decline than what is taking place today.  The decrease in the headline unemployment rate is welcomed, but it does not signal a stable economy.  With sluggish economic growth and money-printer happy policy-makers, investors will continue to see a continuation of stimulus programs and deficits.

Kyle Bass, the Hayman Capital fund manger who correctly predicted the credit bubble, recently urged the second-largest U.S. college fund to keep its $1 billion investment in gold bullion.  According to Bloomberg, Bass told the mangers of Texas’s state university endowment, “I’m against selling any of the gold.”  He cited the need to hedge against government deficits in the United States and Europe.  “As every day goes by, I see deflation in the things you own and inflation in the things you need.”

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Earlier this week, the Congressional Budget Office said the U.S. is on pace for its fourth straight year of a $1 trillion-plus budget deficit.  In its baseline scenario, the CBO projects that the 2012 federal budget deficit will be about $1.1 trillion, with unemployment remaining above 8 percent both this year and next.  In January, the number of planned layoffs at U.S. companies also climbed to 53,486, its highest level in four months, and up 28 percent from 41,785 in December.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com