Gold Rebounds After Finding Support

by Peter A. Grant

March 04, a.m.
(from USAGOLD.com) --

Gold is rebounding this morning after Thursday's correction found support right around the 61.8% retracement level of the most recent leg-up. This level was further bolstered by a short-term trendline and the 10-day moving average. The pullback in gold was broadly attributed to profit taking, which gained impetus as stocks rebounded decisively on Thursday. Nonetheless, from a technical perspective, the gold market looks good. Fundamentally, rising oil prices, geopolitical turmoil in the Middle East and North Africa, along with a weak dollar are all seen as supportive to the gold market.

BREAKING: Metals have caught a bid on market chatter about a protest/riot in Riyadh, Saudi Arabia.

This morning's announcement that US nonfarm payrolls surged 192k in January is encouraging, offsetting December's big disappointment. While the jobless rate edged lower to 8.9%, the historically low labor force participation rate continues to distort that number. The participation rate is held steady in Feb at 64.2%. Tyler Durden of the ZeroHedge blog calculated that the unemployment rate would be at 11.6% based on a participation rate of 66.1%, which is the 25-year average. I think that provides important perspective, but it's also a double edged sword. As previously disillusioned workers are drawn back into the job market by hints that hiring is gaining momentum, the unemployment rate may remain discouragingly elevated by a rebound in the participation rate.

Additionally, if the economic recovery truly is gaining momentum and America is going back to work, it's going to put additional upside pressure on prices. While Fed Chairman Bernanke made it clear this week that -- in his opinion -- inflation expectations remain anchored, the market and the average consumer have become very attuned to price risks in recent months. At the same time, Bernanke's FOMC has a much more dovish complexion now that KC Fed's Hoenig has rotated out as a voting member. Without Hoenig's consistent dissent, Bernanke may have the unanimous consent of the FOMC to continue his über-easy monetary policy. The concern is that given Bernanke's continued concern about backsliding into deflation, that Fed accommodations will be kept in place too long, leading to substantial inflation. Thomas Hoenig expressed that very concern earlier in the week. He may not be a voting member of the FOMC any more, but he's certainly not shy about speaking his mind.

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The other thing the Fed is going to have to contend with is rising oil prices. As we noted earlier in the week, sharp rises in the price of oil tend to proceed recessions in the US. This reality is clearly illustrated in the latest Chart of the Day. In the face of rising oil prices largely stemming from ongoing -- and spreading -- unrest in North Africa and the Middle East, Bernanke is going to find it difficult to tighten policy for fear of pushing the country back into recession. While Bernanke indicated in his MPR testimony this week that he viewed the broad rise in commodity prices as "a temporary and relatively modest" inflation risk, he went on to acknowledge that a "sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability."

No matter how things ultimately pan out for the US economy, physical gold serves as critical portfolio diversification and a hedge against the downside of potential outcomes. To see how gold has performed during periods of deflation, disinflation, runaway stagflation and hyperinflation, please read the headline article from our November newsletter entitled Black Swans Yellow Gold. So as to not miss a valuable issue of our monthly newsletter, I encourage you to subscribe by clicking here.

Have a great weekend.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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