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3.7.14 - Government Statistics Sending More Mixed Signals
Gold prices lower on upbeat jobs report, but gain for the week. U.S. stocks higher as U.S. economy generated 175,000 jobs in February. Gold last traded at $1,338 an ounce. Silver at $20.93 an ounce.
Fresh government statistics are once again sending mixed signals regarding the US economy.
The Labor Department reported this morning that the U.S. economy added 175,000 jobs last month, marking an improvement from January and topping economists' expectations, but the unemployment rate rose to 6.7%, from 6.6% in January.
The 175,000 level is still not robust. Prior to December, the economy had been adding an average of 205,000 jobs each month. Taken over the entire past 12 month period, the average monthly increase was 189,000 jobs; so the employment picture is still in a downward trend.
The U.S. economy lost 8.7 million jobs amid the financial crisis, and as of February, only 8 million jobs had been recovered.
Once factoring in population growth, economists still estimate it will take years to get back to pre-recession health in the job market, when the unemployment rate was between 4% and 5%.
Meanwhile, long-term unemployment remains high. As of February, 3.8 million Americans were unemployed for six months or more. One key component of the employment reports paints a sobering picture. Men between the ages of 25 and 54 are in their prime working years. In February 2008, 87.4 percent of men in that demographic had jobs. Six years later, only 83.2 percent of men in that bracket are working.
This employment rate is an important indicator of the health of the labor market. This snapshot of the overall employment picture means the nation is not even halfway to a full recovery.
This is not good news for the dollar as it will add to the uncertainty about the US economy and financial markets, discouraging investment in US dollar-denominated assets.
The Commerce Department also released a report this morning. The U.S. trade deficit widened in January on a rise in imports of oil and other foreign goods.
The trade deficit increased to $39.1 billion, up 0.3 percent from December’s revised $39 billion deficit, the Commerce Department reported.
Imports rose 0.6 percent to $231.6 billion, reflecting a 9 percent jump in imports of petroleum. Imports of food and machinery also rose.
A higher trade deficit acts as a drag on economic growth because it means U.S. companies are making less overseas than their foreign competitors are earning in U.S. sales. It also serves as a drag on the value of the dollar relative to foreign currencies since more dollars are being sent overseas to foreign nations in return for imported goods. Increasing the supply of dollars tends to negatively impact its value.
One asset that has outperformed most paper assets, particularly stocks, so far in 2014 is gold. A variety of factors have contributed to this, most recently the crisis in Ukraine. Whether or not Russian troops march into Ukraine, it seems probable there will be a negative fallout from the conflict, with the possibility of sanctions disrupting trade and economic activity.
Michael Dudas, Precious Metals and Mining Analyst at Sterne Agee, says there are several reasons gold is moving higher.
Dudas believes the cause of the recent safe haven run-up in bullion will continue. He sees tensions in Ukraine as lingering, no matter what the outcome is in the near-term. He also sees a technical reason for gold to move higher.
"You have continued support of technicals," says Dudas. "You have the gold price break above its 150-day and 200-day moving averages. That's been very supportive after a multi-year decline in the metal."
Though today's employment data release may add a little bit of volatility to gold, it's the longer-term issues that Dudas believes will be more important. "As long as the gold market has discounted the taper," says Dudas, "and the Fed… continues to have zero interest rate policies for a pretty long period of time… I think that combination will continue to trade gold higher."
3.6.14 - Ukraine Crisis Takes Another Twist
Gold prices closed higher, reaching the highest settlement in more than four months. U.S. stocks higher, S&P 500 hits record. Gold last traded at $1,351 an ounce. Silver at $21.57 an ounce.
The crisis in Ukraine has taken yet another twist.
Crimea's parliament voted to join Russia on Thursday and its Moscow-backed government set a referendum on the decision in a dramatic escalation of the crisis over the Ukrainian Black Sea peninsula.
The sudden move to bring Crimea - which has an ethnic Russian majority and has effectively been seized by Russian forces - formally under Moscow's rule came as European Union leaders held an emergency summit groping for ways to pressure Russia to accept mediation.
The decision, which diplomats said could not have been made without Putin's approval, raised the stakes in the most serious east-west confrontation since the end of the Cold War.
Many in Ukraine fear the referendum move by Crimea is a pretext toward secession and the eventual annexation by the Russian Federation.
Crimea is home to both Russia and Ukraine's Black Sea fleets which are locked in a standoff with Russian vessels blockading two Ukrainian warships in Sevastopol Bay.
President Barack Obama attempted to punish the Russians and Ukrainians involved in what he called, "threatening the sovereignty and territorial integrity of Ukraine" by ordering a freeze on their U.S. assets and a ban on travel to the United States.
The names on the blacklist were not immediately made public but a U.S. official said they did not include Russian President Vladimir Putin. Obama did state that the sanctions "do not preclude further steps should the situation deteriorate."
Russian stocks fell and the ruble weakened further after the news. Moody's ratings agency said the stand-off was negative for Russia's sovereign creditworthiness.
Still, Obama seems to be having little success in getting other US allies to follow his lead in sanctioning Russia.
The European Commission has announced aid of up to 11 billion euros ($15 billion) for Ukraine over the next couple of years provided it reaches a deal with the International Monetary Fund, entailing painful reforms like ending gas subsidies.
Diplomats say the EU may condemn Russia's so far bloodless seizure of Crimea and suspend talks with Moscow on visa liberalization and economic cooperation, while threatening further measures if Putin does not accept mediation efforts soon.
The EU must tread lightly on fears of a tit-for-tat trade war with Russia, a major economic partner of Europe. France has a deal to sell warships to Russia that it, so far, has not canceled, London's banks have profited from facilitating Russian investment, and German companies have $22 billion invested in Russia.
The crisis in Ukraine began in November when Ukrainian President Viktor Yanukovich, under Russian pressure, turned his back on a trade deal with the EU and accepted a $15 billion bailout from Moscow. That prompted three months of street protests leading to the overthrow of Yanukovich on February 22.
Moscow denounced the events as an illegitimate coup and refused to recognize the new Ukrainian authorities.
Much of the financial world is still concerned about a real possibility of escalation and armed conflict in Ukraine. CNBC reports that hedge funds are making moves to provide a degree of insurance against a Russia-Ukraine conflict.
In February, the percentage of funds that purchased "deep downside" protection—a financial bet that would gain if there is a significant drop in global stocks—hit a two-year low of less than 13 percent. That spiked to more than 17 percent as of Monday, according to Credit Suisse data.
The real risk is from the likely global economic ripples in the event of more serious Russian military moves in Ukraine.
Ukraine itself is not the big issue for the financial markets, but if conflict breaks out, the whole region is plunged into a wider risk scenario. There would likely be a flight to safe haven investments, such as gold.
The crisis in Ukraine can still send the markets into a tailspin, despite Russia appearing to back away from all-out war.
The country is still on the verge of further violence. There is still unrest in plenty of Ukraine outside the Crimea, and potential for this to spread. International efforts to reach a solution so far have failed.
Even without immediate escalation, the events of this week will have countless reverberations.
Ukraine itself, while a much smaller economy than Russia, nonetheless has the potential to send prices for corn, wheat and gas rising.
Russia's powerful economic and political position in its region means any crisis which potentially impacts growth will have a broader impact. Economists are already cutting their forecasts for Russian economic growth this year.
"The situation is still highly unpredictable," economists at ratings agency Fitch warned on Thursday. They reaffirmed the country's 'BBB' credit rating, arguing that events so far did not quite justify a downgrade, but cut forecasts for GDP growth this year from 2 percent to 1.5 percent.
"If Russia goes wrong here, it will have a global effect," Richard Martin, managing director, IMA Asia, told CNBC.
In purely economic news, new orders for U.S. factory goods fell more than expected in January and shipments also slipped, adding to signs of a recent slowdown in manufacturing activity.
The Commerce Department said this morning that new orders for manufactured goods declined 0.7 percent. December's orders were also revised downward to show a 2.0 percent drop instead of the previously reported 1.5 percent fall.
In a separate report, the U.S. government sharply revised down non-farm productivity for the fourth quarter, mirroring the economy's slow growth pace in the same period.
Productivity rose at a 1.8 percent annual rate instead of the previously reported 3.2 percent pace, the Labor Department said. Productivity, which measures hourly output per worker increased at a 3.5 percent pace in the third quarter.
Economists polled by Reuters had expected fourth-quarter productivity would be revised down to a 2.5 percent rate.
3.5.14 - More Weak Data For U.S. Economy
Gold prices end slightly higher on weak economic data. U.S. stocks fall on disappointing ISM data. Gold last traded at $1,340 an ounce. Silver at $21.27 an ounce.
Reality has returned to the financial markets in the form of more disappointing US economic statistics, while the dispute over Ukraine seems to have entered the economic realm.
Service industries in the U.S. expanded in February at the slowest pace in four years, reflecting a plunge in hiring that shows the biggest part of the economy is struggling.
The Institute for Supply Management’s non-manufacturing index fell to 51.6 last month, from January’s reading of 54, lower than the consensus forecast of economists surveyed by Bloomberg News and the weakest since February 2010. The median consensus estimate of economists was 53.5.
Scant momentum in the pace of hiring, limited income gains and rising mortgage rates are holding back consumers while unusually severe weather also limited retail sales and factory activity.
Also this morning, a private jobs report from ADP showed disappointing hiring results in February. Companies added fewer workers than projected in February, a sign U.S. employers are waiting for a pickup in demand before boosting headcount. The 139,000 increase in employment followed a revised 127,000 gain in January that was weaker than initially reported, the weakest two months since August-September 2012, according to the ADP Research Institute. A median consensus forecast of 39 economists expected a much more robust 155,000 advance.
All eyes will now focus on Friday's employment report, which should have a profound impact on the markets heading into the weekend.
Up to now, pundits have been blaming disappointing economic reports on harsh winter weather, but in reality, economic reports were disappointing before winter set in. It remains to be seen if conditions will improve with the spring thaw.
The past several days have introduced a new worry for the financial markets: the crisis in Ukraine. While the conflict seems to have simmered down for now, it is also entering a new phase: economic conflict.
The Obama administration and some NATO allies have talked about imposing sanctions on Russia for its aggression against Ukraine. Some in the West worry about the negative economic impact of such sanctions on Western companies doing business in and with Russia.
For his part, Russia's Vladimir Putin does not appear to be taking the threats sitting down and is making economic threats of his own.
Putin advisor Sergey Glazyev told Ria Novosti news agency that, " Russia will abandon the US dollar as a reserve currency if the United States initiates sanctions against the Russian Federation."
He went on to say that, “We will be forced to go to another currency and create our own payment and settlement system. We have a fantastic trade and economic relationship with our partners in the east and south, and we’ll find a way to not only reset our financial dependence on the US, but come out from these sanctions with an advantage for ourselves. Efforts to declare sanctions against the Russian Federation will result in the collapse of the US financial system, which will entail the end of US dominance in the world financial system.”
Much of this is bombastic rhetoric, but such threats against the US dollar must be taken seriously as it is already vulnerable with OPEC members and China talking about diversifying out of the dollar.
With the US economy teetering, the dollar is now under pressure from its economic and geopolitical flanks. Investors would do well to diversify into assets that have historically benefited from a weakening dollar, particularly gold.
But the threat to dump the dollar is not the only trump card Putin is holding. A new proposed law in the Russian duma would allow Moscow to seize Western companies' and individuals' property and accounts in the event sanctions were imposed on Russia over the Ukraine crisis.
This could be a double-edged sword. On one hand, it could hit back at the West economically should sanctions come about. On the other hand, it could also cause a rush for the exits before any talk of sanctions begins in earnest, thus backfiring on the Russians economically.
In other news, there are still more developments in the Bitcoin saga, which has seen investors bilked for millions of dollars at the hands of hackers and fraudsters.
"Poloniex", a third hacked bitcoin site, has admitted it is missing 12.3% of its assets because of a flaw in its transaction system. And to top it all off, Autumn Radtke, the CEO of an upstart bitcoin exchange, died last week under mysterious circumstances at her home in Singapore.
Radtke, the U.S.-born head of First Meta, was found dead by local police on Feb. 28, with the cause of death yet to be determined. In a statement on its website, First Meta said the company, "was shocked and saddened by the tragic loss of our friend and CEO Autumn Radtke."
As we have said repeatedly, gold is the ultimate form of real money with a 5,000 year track record as a trusted medium of exchange.