By Gary Wagner

Wednesday August 31, 2016 17:38

There are a number of reasons why gold trades lower or higher on a given day. Logically, we know that it can be a combination of factors. Today, we have but one.

Gold is off quite modestly we might note – about $2.50 at 4PM in New York.

Gold is very sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion. Traders and investors are extremely worried (rightly or wrongly) about a Fed move up at September’s FOMC meeting, which is now only three weeks off. So it is significant that gold is off only a touch.

“Where is this case of the Nervous Nellies coming from?” you might ask. Of course, there are Chairwoman Janet Yellen’s and Vice-Chairman Stanley Fischer’s somewhat hawkish comments last week that issued from the Jackson Hole conference of central bankers.

Bu recent data has been mixed and deeply contradictory. The real data – what people actually did or are doing – has been turning out to be softer than what people believe they are doing or might be doing. Action and sentiment seem to have diverged. (An example is consumer purchases versus consumer sentiment. The former is so-so. The latter is strappingly robust.)

So we are left with the employment report that is due out on Friday from the Department of Labor. ADP, which surveys private jobs numbers said that employment was very solid, though not near the high-tide levels of 2013 and 2014. Additionally, all of those 177,000 jobs gains came in the service sector while manufacturing and construction slipped.

Manufacturing job loss is not surprising but having construction jobs slip in a month known for high construction employment is worrisome. It should be noted, however, that service sector jobs pay about the same on average as non-service-sector jobs, roughly $24 to $27 per hour.

The forecast for Friday’s Department of Labor report is around 180,000, an area that many experts say will trigger a rate rise in September. It might be noted that we are still seeing job losses in the public sector.

We’re going to stick with our assessment and say that jobs are not enough at this point to cause the Fed to fire its interest-rate guns. We think there has to be solid inflationary pressure, which there has not been.

Higher prices are not going to get much help from energy. Today, crude oil was down 3.50% on a stockpile build. West Texas Intermediate is off its 52-week low by almost 20%. So, if there wasn’t significant price pressure when energy peaked, why would there be now?

Some observations on the continuing strength in service sector jobs may hold one of the clues for the low inflation we are experiencing. Unlike tangible goods – anything from sewing needles to shoes to automobiles to washing machines – services can’t be over inventoried.

When manufacturers don’t produce enough goods to fill demand, prices (often) rise.

(Conversely, when manufacturers and wholesalers have stockpiled too many goods, they stop producing. The inventory backlog is then drawn down as sellers wait for buyers to come back to the market. But there is always a lag between list price and sale price and then fire-sale price. So prices to the end consumer for tangible goods can vary immensely over longer periods of time.)

When there is more demand, service companies add personnel. When service providers stop seeing demand, they fire people. And they do so pretty fast. So, price fluctuations in services operate in a narrower range both in prices and wages.

Also, a large, relatively non-corrupt, mature economy tends toward efficiency, not inefficiency. So prices tend to stay quieter.

The CME FedWatch probability gauge implies a 27% chance of a rate rise in September, up a bit from yesterday. The VIX volatility gauge is up very minimally on the day.

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