Unemployment Rate Drops: Should You Sell Gold?

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"The decrease in the headline unemployment rate is welcomed, but it does not signal a stable economy. With sluggish economic growth and money-printer-happy policymakers, investors will see a continuation of stimulus programs and deficits."

On Friday, the U.S. jobless rate dropped unexpectedly in January to 8.3%, the lowest level since February 2009. According to the Labor Department, the economy added 243,000 (K) jobs. Furthermore, todayís report includes revisions adding a total of 60K jobs to payrolls in November and December. The Labor Department also revised Decemberís gains to 203K, from an initially reported 200K.

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The data comes one week after the Federal Reserve voiced concerns over the economy, but with the unemployment rate falling, doubt has been raised on how much additional easing the Fed will provide. As a result, gold and silver both declined more than 1% in morning trading. However, a closer look at the unemployment data reveals plenty to be concerned about. The labor force participation rate, which is the percentage of working-age persons in an economy who are employed or unemployed, dropped to 63.7%, its lowest level in 30 years. A record-breaking 1.2 million people dropped out of the available labor pool used in the unemployment calculation. According to Zero Hedge, using the average long-term labor force participation rate of 65.8%, the real unemployment rate actually increased in January to 11.5%. In fact, the spread between the reported and implied unemployment rate just hit a fresh 30-year high of 3.2%.

Another concerning data point in the unemployment report is that the number of part-time workers is quickly rising, as many people must settle for employment opportunities. In January, the number of part-time workers surged by almost 700K, representing the biggest jump on record. Meanwhile, full-time workers only increased by 80K. If the unemployment picture was truly showing a great improvement and no need for further Fed action, gold and silver prices would most likely see a greater decline than what is taking place today. The decrease in the headline unemployment rate is welcomed, but it does not signal a stable economy. With sluggish economic growth and money-printer-happy policymakers, investors will see a continuation of stimulus programs and deficits.

Kyle Bass, the Hayman Capital fund manger who correctly predicted the credit bubble, recently urged the second largest U.S. college fund to keep its $1 billion investment in gold bullion. According to Bloomberg, Bass told the mangers of Texasís state university endowment, "Iím against selling any of the gold." He cited the need to hedge against government deficits in the United States and Europe. "As every day goes by, I see deflation in the things you own and inflation in the things you need."

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Earlier this week, the Congressional Budget Office said the U.S. is on pace for its fourth straight year of a $1 trillion-plus budget deficit. In its baseline scenario, the CBO projects that the 2012 federal budget deficit will be about $1.1 trillion, with unemployment remaining above 8% both this year and next. In January, the number of planned layoffs at U.S. companies also climbed to 53,486, its highest level in four months, and up 28% from 41,785 in December.

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Eric McWhinnie, Wall St. Cheat Sheet

To contact the reporter on this story: Eric McWhinnie at [email protected]

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