It leads to anxiety disorders, depression, increased alcohol consumption or even drug addiction. And it causes 45,000 suicides a year globally. So you definitely do not want to experience it. To be unemployed. It means that a person wants to work, seeks for a job, but cannot find it. Some people, for whatever reasons, are, unfortunately, unemployed. To determine whether many or few people in a particular economy are unemployed, we use the unemployment rate, which is a percentage of unemployed individuals in the total labor force (employed and unemployed people).
The official US unemployment rate is calculated by the Bureau of Labor Statistics as a part of the Employment Situation Report (which also provides with the non-farm payrolls), which is published on the first Friday of every month for the preceding month. As it provides insights into the strength of the labor market and the economy unused resources – and because the Fed has a mandate to assure the full employment – the unemployment rate is widely monitored by the analysts and investors, including people who invest in the precious metals market.
Unemployment Rate and Gold
What is the relationship between the unemployment rate and gold? Well, unemployment is countercyclical, so it negatively correlates with the GDP over the business cycle and gold. It means that the unemployment rate increases as economic activity slows (and companies lay off workers) and decreases when the economy expands (when firms hire more workers). Hence, the unemployment rate should be positively linked to gold, which also often shines when the economy struggles. Let’s take a look at the chart below to check it out.
Chart 1: US unemployment rate (red line, left axis, as %) and the price of gold (yellow line, right axis, London P.M. fixing) from January 1972 to January 2019
As one can see, there is actually no clear long-term relationship between the gold price and the unemployment rate. Although both data series moved in tandem during the Great Recession, it was rather an exception than a rule. The correlation between the unemployment rate and the price of gold is merely 0.15.
Trough in Unemployment Rate and Gold
The unemployment rate is often a leading indicator. It reaches a trough several months before an economic recession – and when it begins, the unemployment rate rises sharply. For example, as the chart below shows, the unemployment rate reached its lowest level prior to the outbreak of the Great Recession in March 2007 (and then again in May 2007) at 4.4 percent and climbed to 5.0 percent by December 2007, when the recession officially started, according to the NBER. Similarly, it reached a bottom at 3.8 percent in April 2000, rising to 4.3 percent in March 2001, when the recession began.
Chart 2: Unemployment rate from January 1998 to January 2019 (index, when December 2007 = 100).
Peak in Unemployment Rate and Gold
However, the unemployment rate may be also a lagging indicator. It peaks several months after the end of an economic recession – and when the expansion begins, the unemployment rate declines. For example, as the chart above shows, the unemployment rate reached its highest level in the aftermath of the financial crisis in October 2009 at 10 percent, four months after the official end of the recession in June 2009. Therefore, the gold bears who count on expansionary slide in gold may monitor the unemployment rate. When it reaches a peak, the economic expansion has probably already started. And then, gold may struggle. As the last two decades show, it’s not a particularly precise indicator and it will need to be supplemented by other tools in order to make detailed predictions about the gold price.