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Labor Pain(s)

By Jon Nadler       Printer Friendly Version
Jan 9 2009 3:39PM

Good Afternoon,

And now, it's official: "The U.S. economy lost 524,000 jobs in December, closing out the worst year for job losses since World War II, the Labor Department said Friday. Nearly 2.6 million jobs were lost in 2008, with 1.9 million destroyed in just the past four months, according to a survey of work places. It's the biggest job loss in any calendar year since 1945. The unemployment rate rose to 7.2%, the highest in 16 years. Unemployment increased by 632,000 to 11.1 million, according to the survey of households." - Marketwatch. Nothing one can add to that set of numbers, aside from the observation the perhaps economist Nouriel Roubini is being conservative when he estimates a two-year long US recession and a 5% drop in GDP.

The first half of the current year is expected to look worse than what we have seen up to now. If that is still possible. Mind you, Canada has shed twice as many jobs as anticipated during the final month of 2008, raising our own unemployment rate to 6.6% in an unwelcome race with our neighbours. Is there a top-ten economy left around the world without the "R" label having been applied to it yet? 

Economic activity edged closer to a standstill in the UK as output fell nearly 3% in November, to a near three-decade low, Korea cut interest rates to a record low amid signs of severe contraction, and the Bundesbank said that the German economic dip is likely to be deeper than previously expected. Today's grim economic news roundup brought to you courtesy of the collateral damage of the "contained" subprime crisis.

New York gold dealings opened with a tilt towards lower values, and finished with only a very modest book-squaring related shortcovering climb in futures, as players digested the jobs data and as crude oil lost more value and headed towards $40 per barrel and eventually under that mark. Spot gold was off by $2.00 at $854.90 per ounce this afternoon, trading roughly at its morning opening level, and was held in check by a rise in US dollar (to 82.60) on the index. Silver climbed 19 cents, to reach $11.29 in the afternoon hours, while platinum was unchanged at $987 and palladium fell $3 to $192 an ounce.

Gold continues to meander in the broader $830-$890 channel and a break through either end of that price spectrum could usher in a $40 to $50 follow-through that could bring values to either $775 or to $940. And, at, and beyond those levels, the fun could really extend by about the same incremental amounts. We remain in strong disagreement with starry-eyed sources that see some beneficial conditions for gold in the employment figures, or current economic conditions. We also remain opposed to the very shopworn theory that some kind of Weimar-style wheelbarrow hyperinflation is a sure bet and only a matter of time for the US.

But, enough of the early 2009 crystal ball-gazing game. The immediate focus is (or ought to be) on headlines such as Signet's 15% drop in jewelry sales in the US and the UK (this, during Santa season!) and on India's nascent gold ETF sector, which lost 4.3% in assets under management during December's price spike in bullion. Not to mention Marc Faber's take on gold not going very much higher in the near-term, due to its relative over-valuation to the CRB index when compared to a host of industrial metals. While some of the base metals are indeed under marginal production costs, their fate in terms of price will have to depend more on a true revival of actual demand rather than the quick plays of speculative funds. Thus, be prepared for false rallies through mid-year.

Investec, a South African investment bank, sees platinum at $970 this year, followed by $1,350 next year. The firm also expects palladium at $220 in 2009, and a climb to only $250 in 2010 ( a $100 lower level than the previous estimates). West Australia Business News reports that a Deloitte analyst expects more junior mining failures this year as cash flow dries up, and as credit is still harder to find than a 25.5-kilo gold nugget in Kalgoorlie.

While markets digested what is a very tough serving of economic news today, some have already indicated that the figures could have been worse and are placing counterintuitive trades, and 24/7 Wall Street's Doug McIntyre found the potential birth of the eventual recovery in today's labor pains:

"By most estimates the report on December unemployment could hardly have been worse. Many experts believe that 500,000 jobs would be lost and that unemployment would rise to 7%. The actual figures came in at 524,000 and 7.2%.

But, the disaster may be in large part what saves the economy.

The great enemy of stopping the frightful fall in employment, the catastrophe of corporate earnings, and the plunging housing market is that time is not on the government's side. That is an observation which has almost been made too often.

If Nobel Prize winner Paul Krugman and other leading economists are right, the federal government has less than two months to get a huge economic stimulus package into the market place. There is still debate about whether it should focus on building infrastructure, creating jobs, keeping mortgages from default, or cutting taxes.  Which of those is the best path is impossible to determine beforehand. It may be that it will never be entirely clear exactly what hurt or helped the economy. Those issues are still being debated when it comes to the reasons American got into and out of the Great Depression.

Congress and the Administration are concerned about the economy but the panic and the adrenalin rush which accompanies it have not hit with a full force. The prospect of another 524,000  people being put out of work in just 30 days and the likelihood that the situation will only get worse as industries from retail and automotive cut more people may be the only thing that drives an admittedly imperfect set of bills though Congress, to the President's desk, and into the bureaucracy that must implement the programs.

The debate over which direction a stimulus package should go is a debate over perfection. Everyone involved has a strong idea of which measures are flawed and which will work. These are randomly colliding like pin-balls now and there is not enough incentive to take a course, steer by it, and hope that it will be close to the right decision.

The jobs reports was awful, but the sight of the gallows focuses the mind."

Gold finished down for the week, for the first time in five. Rebalancing continues. Watch copper, oil, and gold.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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