US Politics and Precious Metals

The recent comments concerning the precious metals markets still focus on tapering by the Fed. In this context, one would expect that the forthcoming US labor market report, which is scheduled to be released on Friday October 4, 2013, might be the most important factor for the precious metals this week. A strong US labor market report is probably negative for gold as it would increase the likelihood for reducing the volume of bond purchases at the next FOMC meeting.

However, the crucial question is: What makes the US labor market report a strong one? The non-farm payroll figure is predicted by the consensus of Wall Street economists to increase by 10K to 179,000 new jobs created in September. Thus, a significantly higher non-farm payroll number might be already regarded by some traders as a strong report. But one has to keep in mind that also the figures for the two preceding months are subject for revisions. Even if the non-farm payrolls comes in higher than forecasted the labor market report could still be perceived as a weak one in the case that the household survey disappoints.

The recent decline of the unemployment rate was the result of a low labor market participation. It has been pointed out in this blog that during the summer vacation months, there is little incentive for unemployed persons to look for a new job and to return back to the labor force. However, chances might increase after the US Labor Day holiday and thus, some persons might decide to join the labor force again and look for a new occupation. In this case, the unemployment rate might edge up again slightly. An increase in the unemployment rate would most likely convince the majority of the FOMC voting members that the decision made in September was the right one and it would be still too early to taper.

Thus, it is hard to predict, which influence the US labor market report might have on the price development of precious metals. If the majority of market participants comes to the conclusion that the labor market report would lead to a further delay of tapering, then precious metals might trade higher. But the upside might be capped as many economists and commentators could argue that tapering would be only postponed by one FOMC meeting.

However, another political development in Washington could lead to the result that the BLS (Bureau of Labor Statistics) might not be able to release the labor market report on October 4, 2013. The US administration might be forced to close all non-essential departments if not a last minute compromise on the budget for the next fiscal year starting on October 1st is reached. Furthermore, the US Treasury is approaching the debt ceiling and it is estimated that by mid-October the US Treasury runs out of sufficient funds to honor all obligations in time.

Currently, it seems that financial and commodity markets are relatively relaxed. The situation is not uncommon and had been solved just right in time several times since the summer of 2011. Kenneth Rogoff and Carmen Reinhart titled their famous book “This time it is different” as a warning. Whenever somebody used this argument to promote an investment, times were not different and the investment ended in losses. This might also explain that markets are currently relatively calm. However, is the current situation really the same as it had been before?

In the past, there had been already some movements towards a compromise, albeit slowly. This time, there appears to be not any compromise in sight. The situation resembles like two trains collide at full speed and none of the drivers stepping at the brakes. The Tea Party fraction of the House Republicans sticks to its demands and is not showing any willingness to move even one inch towards a compromise. At the time of writing, a last minute compromise appears light-years away.

A failure to reach an agreement on the budget for the next fiscal year would have serious negative consequences for the US economy. The Fed would have to postpone tapering for quite some time into the future. The normal reaction among investors in periods of economic weakness would be to buy the government bonds and notes. However, with the looming debt ceiling and the risk that the US Treasury might default on its obligations, the US Treasury market is not the safe haven it used to be. But gold will not default and therefore, if a rush into safe havens sets in, gold might rally like in the summer of 2011. Only in this respect, times might not be different.