Unemployment and Fed Tapering

Written By Brian Hicks

Posted September 11, 2013

The unemployment rate has decreased again, so more people are working! Wait…that may not actually be true.

While the unemployment rate dropped to 7.3 percent last month, hitting its lowest level since December 2008, it may be for the wrong reasons. Instead of people returning to work, it may be more about people dropping out of the labor force, perhaps because they’ve given up on finding a job or they are retiring.

Bernanke June 7thThe reason for the decrease in the unemployment rate matters because it predicts the longevity of it. If it’s just that people have given up on finding employment, those people can come back in, and that will end up raising the unemployment rate again. This ultimately means the economy isn’t recovering as quickly as everyone thinks it is.

The Fed is watching the unemployment rate closely, just as a runner stands ready for the “go” signal at the start of a race. If the unemployment rate continues to decrease, the Fed may consider this the “go” signal for stimulus tapering. However, it has to be for the right reasons, or it will sabotage its stimulus goal in improving the economy.

On Friday, the payroll data for nonfarm jobs threw the Fed for a loop. It was expecting a “go” signal, but instead members were left scratching their heads. Only 169,000 jobs were added last August.

This is significantly fewer than the 180,000 jobs expected. That’s a difference of 11,000 jobs. The Fed can’t say this is good enough. Job generation just isn’t happening as quickly as hoped. And the public is wondering now more than ever if they’ll taper.

Is this good news for you? Well, it depends on how you invest.

Where You Shouldn’t Invest

The Fed’s decision isn’t scheduled to come out until next week, but investors are doing their best to decide what will happen. Do you find yourself in this situation?

Think about interest rates when you’re trying to come up with an investment decision. The central bank reports interest rates will not increase until unemployment hits 6.5%.

According to John Williams, San Francisco Federal Reserve Bank President, the unemployment rate isn’t going to hit that level until at least the second half of 2015. That means any investments relying on interest rate returns aren’t going to be good for you right now.

Where You Should Invest

So if interest rates remain stable what should you do as an investor? Gold may be a safe bet.

When the payroll data came out on Friday, gold prices soared $20, or 2%. With the lower-than-expected numbers, the Fed may not taper as much as first anticipated. For example, instead of tapering around $20 billion in bond purchases, it may only pull back $10 billion. This could make gold rise as the economy adjusts.

In addition to the Fed’s stimulus reduction, Syria is causing a lot of distress. With the U.S. still trying to make a decision on what to do with the crisis, you may be like many investors fearing the ramifications of military intervention.

This fear is what is fueling the gold market. It’s always been the safe haven during war times, and here it is again, welcoming investors with open arms.

The third reason for gold prices increasing now and in the near future is demand. Imports of gold are increasing, especially for Hong Kong. It has imported 16 million ounces in 2013 – twice as much as last year.

But supplies aren’t meeting demand, and production is low around the world. When demand is high and supply is low, it leads to one thing: higher gold prices!

With unemployment rates decreasing for the wrong reasons, disturbing payroll data, and a possible Fed taper, you can seek comfort in gold. As everyone has seen, gold is responding to employment data and to the Fed’s decision on its stimulus program. Take advantage of the positive gold market, as many other investments are seeing the negative effects of the economy’s instability.

 

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