Friday's much weaker than expected jobs data may have been the strongest indication yet that the US economy is already in a recession. Non-farm payrolls fell by 63,000 jobs in Feb, the biggest monthly decline in five years. Factor in the 38k increase to government payrolls and you net a 101k loss of private sector jobs. In addition, Jan was revised from -17k to -22k and the big increase of 82k in Dec-07 was cut in half to just 41k.

The unemployment rate actually dropped to 4.8% in Feb from 4.9% the month before, but that is attributable to a decline in the workforce of 450k. The data suggests that laid-off workers have given up the job hunt for the time being. It is widely believed that the unemployment rate will be 5% in March and could reach 5.3% by mid-year.

The downward track of job growth since Oct-07 suggests that a recession may well have begun in Q4-07. Given the Fed's bias of focusing on growth risks, a 50bp cut at the 18-Mar FOMC meeting is likely. A 75bp cut has been fully priced in by the market and risks of an inter-meeting cut have grown since the payrolls data came out. Deferred Fed funds futures contracts, beginning with May, suggest rates are headed below 2% later this year.

The prospect of another aggressive rate cut by the Fed continues to weigh on the dollar. The greenback dropped to new record lows against the euro and Swiss franc, as well as a basket of currencies last week. As US interest rates drop, US assets become less attractive, particularly to foreign investors. Consequently, the demand for dollars decreases. As the dollar declines, the demand for gold as an alternative asset increases.

With the markets fully on "inflation watch" at this point, the equities markets are looking rather vulnerable. The DJIA fell 146 points on Friday after the jobs data came out. These losses came in the wake of a 214-point drop on Thursday. Stocks are modestly higher this morning on expectations of lower interest rates.

A sustained decline in the stock market is likely to have a supportive impact on gold. As money comes out of the stock market, gold is an attractive means of storing wealth in an environment of low interest rates and a declining dollar.

Platinum and palladium have sold off sharply in recent sessions on growing concerns of a US recession and an anticipated decline in industrial demand. These markets have logged impressive gains already this year, 50% and 61% respectively, from the beginning of the year to the recent highs. It's not surprising to see some profit taking. Recent news that the power crisis in South Africa might be easing somewhat has contributed to the sell-off on expectations of higher supplies.

Gold Market Movers:

Rumors of a Fed rate cut today.

US wholesale sales for Jan surged 2.7%, well above market expectations, versus a revised -0.5% in Dec. Wholesale inventories +0.8%.

Fed TAF auctions for 10-Mar and 24-Mar will be increased to $50 bln each, rather than previously announced $30 bln. The Fed's significant increase in the size of these liquidity injections bodes well for gold. Minimum bid rate for today's auction set at 2.39%.

UK input PPI for Feb surged to 19.4% y/y, higher than expected, versus 18.9% in Jan.

Norwegian core CPI 2.2% y/y, higher than expected.

There is still more bull left in gold bullion

South African gold output fell 7.4% last year

Investors plan to buy more commodities

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

-- Posted Monday, 10 March 2008 | Digg This Article