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'Monster' U.S. jobless claims to keep climbing; gold prices to make run at $1,700 - analysts

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(Kitco News) - The “monster” number of weekly initial U.S. jobless claims reported Thursday – more than four times the old record high – is a harbinger of economic weakness to come, and that in turn should push gold prices still higher, traders and analysts said.

The COVID-19 pandemic has slowed economic activity around the globe as governments urge the populace to avoid contact with other people, meaning shutdowns of many businesses and consumers avoiding those that are still open. In response, Federal Reserve policymakers and U.S. lawmakers are rushing to provide monetary and fiscal stimulus, which is viewed as ultimately inflationary.

“If these conditions aren’t bullish for gold, I don’t know what else could be,” said Sean Lusk, co-director of commercial hedging with Walsh Trading. “There is no confidence in any of the currencies. The Fed is printing money at record paces now, even more so than 9-11 [the Sept. 11, 2001 terrorist attacks on the U.S.] and after the Great Recession of 2008 and 2009.”

The Labor Department reported that initial jobless claims soared by 3 million in the week to Saturday to 3.28 million, shattering the old record high of 695,000 set back in 1982.

Gold began rising ahead of data that was widely expected to be terrible, then built on its early gains after the report. As of 10:18 a.m. EDT, Comex April gold was $31 higher to $1,664.40 an ounce. Several observers said they anticipate a retest of chart resistance around $1,700.

“When you have high jobless rates, it means the government is likely to continue an accommodative monetary policy, keeping interest rates low and trying to stimulate business activity and get people back to work,” said Thomas Winmill, portfolio manager of Midas Fund (MIDSX), a mutual fund focused on precious-metals and natural-resources companies.

“Low interest rates tend to result in a negative real-interest-rate environment….That is normally very good for commodities such as gold. It’s hard times for people but can be very good for investing in commodities, relative to financial investment to say fixed income.”

Besides ultimately spurring inflation, low rates have potential to undermine the U.S. dollar, which helps gold. Also, low rates mean investors might turn to a non-yielding asset like gold since they would get little interest payments on fixed-income assets anyway.

The U.S. stock market is trading higher despite the weak jobs number. The recent stabilization in equities is constructive for gold since it takes away a factor that had prompted selling for much of the month, explained Daniel Pavilonis, senior commodities broker with RJO Futures. When stocks were in their earlier downward spiral, market participants were selling other assets – including gold – in order to meet margin calls and offset losses elsewhere.

“The market seems to be risk on. I think that’s good for gold,” Pavilonis said. “After the previous washout in the metals, the buying is coming back again.”

He and Lusk anticipate further gains for the precious metal, although with corrections.

“Gold looks pretty strong, although I’m not so sure there won’t be another risk-off event,” Pavilonis said. “But I don’t think we’re going to break down significantly in the metals. Ultimately, it [gold] looks like it wants to go higher.”

Lusk commented that the “big money” started coming back into the gold market after the April futures fell as far as $1,450.90 on March 16.

“Where else is there a safe-haven play? Bonds are not yielding anything,” Lusk said. “We’ve gone – in some respects – to negative rates in the very near term. So that is all promoting a flow into metals.”

Further, he pointed out, physical metal is likely to become harder to come by with many mining operations and gold refiners curtailing output in response to safeguards around the world meant to slow the COVID-19 outbreak.

Lusk suggested the area around $1,700 an ounce may provide some near-term resistance. April gold stopped just shy of this the last two business days and just above on March 9. However, Lusk said he anticipates the metal rising to $1,750 in the not-too-distant future. Down the road, Lusk continued, the market may well test the old record highs above $1,900 an ounce in 2011.

“I think you’re seeing money put into the metals as safe-haven assets,” said Charlie Nedoss, senior market strategist with LaSalle Futures Group. He later added, “The precious-metals complex should keep a good bid through this. I think we will make another run at that $1,700 mark in gold.”

Higher claims data likely to continue

Thursday’s report was perhaps the most widely anticipated ever for jobless claims. With much of the country on self-quarantine to combat the spread of the global COVID-19 pandemic, economists figured in excess of a million people would be filing during the same week, meaning a sudden jump rather than a gradual one.

“That 3.3 million [of initial jobless claims] was a monster number,” Nedoss said. “I think the market was ready for it, but I think we’re going to see bigger numbers.”

He and others cited anecdotal reports that some people who went to file for jobless benefits ran into problems with overburdened websites, which would would mean a likelihood of more claims to come.

Andrew Grantham, senior economist with CIBC World Economics, pointed out that the jobless claims are equal to more than 2% of the employed population, based on the household survey for the February employment report that was issued at the start of March.

“There were suggestions that state websites and phone systems were struggling to cope with the volume of applicants, implying that today's figure could actually understate the number of people losing their jobs and suggesting that we will see further very high claims numbers in the weeks to come,” Grantham said.

He said that initial claims are expected to remain “highly elevated” in the near term as more areas of the U.S. economy face shutdowns and more companies lay off staff, although eventually a fiscal support package that is working its way through Congress should “help soften the blow.”

Grantham added that the jump in claims may not be reflected in the March employment report due out next week, since the claims period came after the survey week for March's payroll and unemployment data. So far, the consensus estimate is for the unemployment rate to to increase to around 4%. “A much bigger jump will be seen with the release of April data,” Grantham said.

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