Everything is Awesome!

Last night precious metals saw their biggest fall in some time on the back of indices showing US manufacturing expanded at its fastest pace in 3 years in August and the USD correspondingly jumping.  The market sees this as proof of the US economic recovery and expectations of rates rising sooner rather than later and less need for the safe haven of gold and silver.  This, all on one month’s data…

The famous Wall Street magazine, Barron’s this week did a feature article on what we keep saying, and that is "The job market has made a comeback over the past year, but the American labor force hasn't and the prospects don't look good”. They cite the percentage of adult American workers who are actually in the workforce is at its lowest level in 36 years with no rebound in sight. The Bureau of Labor Statistics themselves said it expects a further decline in labour force participation to just 61.6% by 2022.  Barron’s point out it is likely far worse with that study making no mention of the surge in disability filings that has already claimed millions of dropouts from the labour force and will likely claim more, and makes no mention of the Affordable Care Act's likely negative effects on incentives to work with already nearly one of every eight prime age men (aged 25 to 54) not in the work force.  Remember too that roughly 1 in 6 families are on food stamps as well.

This has a number of implications.  With such low participation rates the 6.3% unemployment rate is quite misleading and puts pressure on the Fed to raise rates because “Everything is Awesome” (thanks Lego movie & Nick Hubble) when it clearly is not, and they know it.  It’s not just employment but a continually struggling housing sector and poor consumer spending as well.  The US also know they can’t afford the interest bill on higher rates on all the debt they’ve accumulated (without printing even more money to do so…. Ponzi scheme anyone?) especially if they lose the reserve currency status.

Maybe the scarier thing is it just compounds their deficit issue as there will be less tax payers supporting more people.  We often remind you of the US’s fiscal position and this just reinforces their issues.  Our point?  Gold and silver are being driven down by sentiment that dearly wants to believe “Everything is Awesome” but it just plain isn’t as there are deep rooted structural issues beyond a few month’s good news in an environment of near zero interest rates and (albeit tapered) printed money.  Can it get better? Absolutely.  But as Abigail Doolittle, founder of Peak Theories Research, told CNBC last week "As scary as it is, I think that we could see possibly a 50 percent or 60 percent correction—an equal and opposite reaction to all these unusual policy moves."  A balanced portfolio keeps the gold and silver hedge at a time when everything is clearly not awesome.