By Tony Davis
Investors are anxiously waiting on the edge of their seats to determine what the Federal Reserve’s plans are with respect to their $85 billion a month bond buying program, but the Fed provided very little guidance in their statement on Wednesday, only indicating that the economy is showing modest growth, which some investors construe as a slight weakening of the economy when compared to their previous statements of “moderate growth.” This Friday’s jobs reports for the month of July will likely be a key determining factor with respect to the time of the Fed’s tapering. The consensus among economists is that 175,000 +/- jobs were likely created in July, which is slightly off from last month’s BLS report of 195,000 new jobs. If the consensus is accurate, we’ll likely begin to see tapering within the next couple of months; however, if the jobs data is weaker than expected, the Fed will likely maintain its current program indefinitely.
At the moment, there appears to be a bit of uncertainty in the gold and silver markets in anticipation of the BLS jobs report. Gold and silver sold off midday on Wednesday, but rallied in the afternoon. Early morning trading on Thursday was positive, while late morning revealed a bit of a retreat in prices. Uncertainly usually causes volatility in the market, so we should begin to see a bit more stability in the markets following Friday’s report.
While there appears to be some conflicting economic data as of late, the individual investor can appropriately position themselves based on their projections of GDP and jobs growth. For instance, if you believe that July’s jobs report will be weaker than expected, you should buy gold and silver now, as disappointing data likely means that the Federal Reserve will continue with their $85 billion a month bond buying program and zero percent interest rate policy. However, extremely poor jobs data could indicate that we’re potentially headed for a recession, in which case, we’re likely to see a pullback in the price of gold and silver. However, this is only likely to be a temporary phenomenon, as gold and silver may be the beneficiaries of a flight to quality during a stock market selloff. Furthermore, the Federal Reserve will likely step up their quantitative easing efforts, which is likely to weaken the dollar and cause hard assets, such as gold and silver, to increase in value.
On the other hand, if you believe that Friday’s jobs data will meet or exceed projections, and are confident that we’re on the solid path to a recovery, with little to no chance of slipping back into a recession, then now appears to be a good time to sell gold and silver; at least as a short term play. Typically speaking, strong employment figures translate into a strengthening dollar, and will likely step up the Fed’s tapering timeline. Reducing the rate of bond purchases should help to keep inflation in check, and assuming that no black swans hit us on the road to recovery, we could see Goldman Sachs’ 12 month gold target of $1175 come to fruition. While it’s anyone’s guess as to what the next week, month, year or longer will reveal about the strength of the economy and the jobs situation, that doesn’t negate the fact that investing in gold and silver bullion, in the form of coins, bars, or rounds, will likely continue to be a wise long term investment strategy.