Weekly Hard Assets Insights
By David McAlvany

Oil, the Dollar, and Worker Disinterest Up Sharply

The big economic news of the week came with Friday’s non-farm payroll release for May by the U.S. Labor Department. Last month’s April release shocked analysts by delivering about a quarter of the number of jobs expected. On Friday, the latest May numbers also came in short of estimates. According to the Labor Department, the U.S. economy added 559,000 new jobs in May versus average estimates of 650,000 from economists polled by Reuters.

The 559,000 new jobs for May was a notable improvement from April’s 278,000, but still puts the pace of job recovery well below expectations. Employment is still running 7.6 million jobs below the February 2020 pre-Covid level. While the report showed progress, it very likely won’t constitute the “substantial further progress” Fed Chair Jerome Powell is requiring before altering the Federal Reserve’s ultra-easy monetary policy stance.

The stubbornly slow pace of new job increases seems to be the result of continued worker disinterest. As Chris Low, chief economist at FHN Financial, put it, “There are still a lot of people unemployed, but there does not seem to be a lot of eagerness to work…. There would have been many more hires if employers could find more people.” The job openings are there, the unemployed workers are there, but, to a frustrating extent, rather than fusing together and translating into robust new job creation, these two categories largely remain two ships passing in the night.

In their Small Business Survey released last month, the National Federation of Independent Business (NFIB) showed a record 44% of business owners reported job openings they could not fill, and credited supplemental unemployment benefits as the top cause. Further illustrating the issue of worker disinterest, a U.S. Chamber of Commerce survey on Friday showed 61% of unemployed people were in no hurry to return to work. In addition, 30% said they did not expect to resume working this year, with nearly half of those indicating they never plan to work again. According to the NFIB, this inability to find employees is the biggest issue facing small businesses, and is hurting economic growth.

The most immediate remedy at hand within the control of businesses would be wage hikes and/or increased benefits. In Friday’s Labor Department report, average hourly earnings rose 0.5% after a hefty 0.7% increase in April. The year-over-year increase in wages now stands at 2.0%, but more may be needed. Increasing wages also plays an important role in the overall inflation concern. The Fed has been adamant that inflationary pressures will be “transitory,” but wages are sticky. Increases are almost never “transitory,” and could be one factor supportive of more intense and persistent inflation than the Fed is forecasting.

Elsewhere in the wild world of markets, this week was a significant one for crude oil. The price of crude broke out to new highs for the post-Covid rally. The new highs follow a significant consolidation period from March to mid-April. They open up the possibility that oil prices have just begun what could be another significant leg higher in the rally off the Covid lows. If a second leg up in oil prices is underway, that would at least bring Goldman Sachs’ $80 oil price target into play. A technical case can be made for a second leg in the oil rally extending well beyond the $80 level by the end of the summer.

One snapshot of oil demand comes from AAA. The organization estimated that 37 million Americans travelled over 50 miles this past Memorial Day weekend. That would represent more than a 60% increase from last year’s Covid-depressed number of 23 million travelers. While this is a very strong recovery, it still represents 13%, or nearly 6 million, fewer travelers than in the pre-Covid world of 2019. With the improving economy, increasing vaccinations, significantly reduced Covid restrictions, and a population increasingly feeling safe again, there still remains a large pool of pent-up demand that’s likely to continue to hit the market throughout the remainder of the summer.

Oil inventories on the week featured a major drawdown on crude of 5.1 million barrels. Another half million barrels came out of the Strategic Petroleum Reserve, for a total draw of 5.7 million barrels. Gasoline saw an inventory build of 1.5 million barrels, and distillates had a big 3.7 million-barrel build. U.S. production was down to 10.8 million barrels from the steady 11 million we’ve seen for weeks.

In the gold market, the yellow metal had a suddenly volatile week when on Thursday the price dropped by almost $37 to close the day at $1873.30. Thursday’s drop of 1.92% was one of the biggest daily declines over the last several months. Rather than any Friday follow-through on the downside, gold prices instead rallied to regain about $20 in price. In terms of market sentiment, technicals, and historical seasonality, gold is due for a short-term correction. Such a corrective move would be healthy, and provide fuel for possible further up-side gains.

In addition to working off short-term overbought conditions, the late-week volatility in gold was likely related to similar late-week U.S. Dollar Index volatility. Just as the gold price is short-term overbought, the dollar index is short-term oversold and potentially due for a bit of a bounce. In addition, the dollar index has spent weeks around the 90 level, inching ever lower and closer to major technical price support at just above the 89 level. That 89 level in the dollar index is, to date, the floor on the major dollar decline we’ve seen in response to unprecedented dollar-bearish U.S. government policies following the 2020 Covid crisis. That support zone provides an ideal opportunity for a U.S. dollar bounce. On Thursday, the dollar index seemed to be headed in that direction with a big move of 0.64% higher on the day.

So, despite partial retracements on Friday, Thursday’s gold selloff and dollar index rally may have set the stage for a possible short-term corrective phase for each asset. Next week will provide some further clarity as to whether that is in fact the case, but we are approaching a significant juncture in both markets. Whether imminently or after a technical bounce, a break below the 89 level in the dollar index would confirm that the major move lower in the dollar is still unfolding, and that the dollar index will still need to search lower—potentially considerably lower—levels for a significant bottom. This scenario would likely be the right fuel to power another substantial leg higher in gold. We are watching the technical and fundamental developments in both markets closely.

As for weekly performance: The S&P 500 was up 0.61%. Gold was down 0.70%. Silver lost 0.39%. Platinum was down 1.52%, while palladium was higher by 0.43%. The HUI gold miners index was off 1.77%. The IFRA iShares U.S. Infrastructure ETF was up 1.05%. Energy commodities were higher on the week. Oil rallied 4.98%, while natural gas prices were up 3.72%. The Commodity Research Bureau Index was higher, up 2.23% despite copper losing 3.21%. The Dow Jones U.S. Real Estate Index ended the week higher by 2.61%, while the Dow Jones Utility Average Index was up 0.39%. The dollar was up on the week by 0.16%. The yield on the 10-year Treasury dropped 2 bps to 1.56%.

Have a great weekend!

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC