Markets far and wide have been fixated by the potential for the US Fed to raise rates this month or, more likely, next. I’ve felt the odds of a rate increase were much higher than the market was pricing in until recently. Bond yields have been trending up for a couple of weeks now, displaying increased acceptance of a potential rate increase by traders. Until this morning, that is.

The US Labour Department just reported what can only be described as a massive miss on the payroll number for May. Payrolls were expected to increase 160,000, matching April’s preliminary number. Wall St assumes the economy is accelerating (don’t they always?) but a couple of temporary issues like a strike by Verizon workers were supposed to keep the number from moving.

Not so much. The May payroll number was just reported as an increase of 38,000 – a 128,000 miss to the downside, and the April number was revised downward by 37,000, meaning a combined “miss” to the downside of 165,000 jobs, one of the biggest misses in recent years. Also potentially significant is the fact that labour force participation “unexpectedly” (there’s that word again) dipped last month falling another 0.2% to 62.6% and that increases in hourly earnings resumed their measly pace of 0.2%. The participation rate matters as it accounts for ALL of the decrease in the official unemployment rate from 4.9% to 4.7%. All in all, it’s a pretty horrible report. So horrible in fact that I expect it to be revised upwards in coming months but, as always, Wall St will react to the initial number.

The effect on the gold, commodities and currencies market is predicable. Gold took off like a rocket the instant the number was published and is up over $20 as this is written. The USD Index is off 0.8, and it’s been trending down for a few days. Interestingly, potential for the Fed to lose its nerve again is not boosting equities. The SPX index is off about ten points as this is written. This reflects the fact NY is again priced to perfection and closed yesterday at levels it has been unable to surpass for the last year. Looks like the Dow 20,000 crowd will have to put the poms poms away for a while. 

The impact on gold stocks, and the resource sector in general should be obvious enough in an hour or so. Expect a large lift for all the gold indices. While many of the chartists have been calling for gold to dip to $1180 to $1150 we may just have seen the bottom on this pullback. There will be plenty of twists and turns going forward but the technical picture just greatly improved. The Commitment of Traders report that comes out late today is also likely to show a more balanced gold market with less commercial shorts and speculative longs. Again, a good set up for a renewed rally.

I made my views plain in the last couple of Journal issues – we were experiencing a garden variety correction in a broader uptrend that is the start of a new bull market for resource stocks. It was a pullback I suggested you not trade unless you were nimble. If you are, the “trades du jour” would be the obvious suspects in the development space on the HRA list, companies like Orezone (ORE-V), Victoria (VIT-V), Pure Gold (PGM-V) and Goldrock (GRM-V) all have pretty direct leverage to short term gold prices and should see immediate gains. Earlier staged names with resources in hand like GoldQuest (GQC-V) and Columbus (CGT-V) should also benefit and even the higher profile exploration stories like Colorado (CXO-V) and Sirios (SOI-V) should be bolstered even though – and this is important – they never got marked down much in the first place. 

Eric Coffin, Editor of the HRA Journal

It’s back on.

Regards for Now

Eric Coffin

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