When the U.S. Bureau of Labor Statistics released the month's nonfarm payroll figure Friday morning, the most common reaction was surprise, followed closely by a little confusion. According to the release, the economy added 146,000 jobs last month, placing November roughly in line with the trend of the last few months; the unemployment rate fell to 7.7%, the lowest it has been since 2008. In the wake of Super Storm Sandy, many economists were expecting to see a jobs report that was more significantly below the annual average of 151,000 jobs added per month.
Despite the "strong" figures, gold prices climbed on the news; using the SPDR Gold Trust (GLD 0.59%) as a proxy, the yellow metal was up nearly 0.5% on the day. While strong economic conditions tend to be bearish for gold, there are several other forces at work in the market that are driving prices. Ultimately, Barrick Gold (GOLD 3.57%) remains my favorite play in the space, driven largely by the company's dominant position in the market, and newly found discipline.
Looking beyond the numbers
Given the significant impact of Sandy on the economy of the East Coast, many were expecting a weaker jobs number than what was reported. At the extreme end of the spectrum, the conspiracy theorists returned to the forefront crying foul and asking to what extent the numbers are skewed, if not outright manipulated. Without joining the fringe, nobody should be surprised when these numbers are lowered dramatically on December 21 , when the BLS takes its next pass over the figures.
The BLS, in its release, said:
Survey response rates in the affected states were within normal ranges. Our analysis suggests that Hurricane Sandy did not substantively impact the national employment and unemployment estimates for November.
Leaving aside that the National Hurricane Center has determined that Sandy is not to be classified as a hurricane, it is hard to believe that a storm that created such havoc had zero impact on unemployment.
One explanation that seems reasonable is that in the aftermath, enough jobless individuals simply left the labor force to bring down the unemployment rate. In order to qualify as unemployed, you must be simultaneously out of work and actively seeking work. When survival is the top priority, job hunting may fall by the proverbial wayside, although there is nothing to suggest that this is truly the cause of the shift in the base unemployment rate. Of perhaps greater significance is the fact that, in order to "be counted, a person would needed to have been out of work for three weeks or so on Nov. 12. The storm hit Oct. 29." This would suggest that next month's numbers are where we should see a significant impact to this statistic, if such an impact exists.
What's driving gold?
Placed in the context of possible further Federal Reserve action next week, the NFP number is still relatively weak. Since the announcement of perpetual quantitative easing, QE3, or QE4Ever -- depending on the specific moniker you prefer -- the Fed has made it clear that, until the labor market comes back under control, the central bank will pump $40 billion per month into the economy. Relative to a nominally better NFP number than had been expected, the prospect of significant inflation remains firmly in control of the commodities markets, specifically, precious metals and, specifically, gold.
The precious metals markets gave us some indication of what is driving prices when it failed to react to positive action between the International Monetary Fund (IMF) and the Greek government. Inflation concerns seem to be solidly entrenched, despite the fact that most leading economic indicators have yet to show any significant signs of inflation. The simple reality is that, at the rate that the Fed is pumping out money, inflation is inevitable.
Making an allocation
While there are a myriad of strong opinions on which gold miner is the best choice for your portfolio, my definite preference is for Barrick. Aside from being the largest gold producer by volume, the company's fundamentals look solid relative to some of its closest peers. Where Barrick is trading at a P/E of 10, Newmont Mining (NEM 13.11%) trades at a P/E of 205, and Goldcorp (GG) trades at a P/E of 19.9. Goldcorp does have a slightly more attractive operating margin of 41% relative to Barrick's 35% (Newmont is at 29%), but the dividend yield advantage goes to Barrick over Goldcorp -- 2.4% relative to 1.5%.
Ultimately, what tips the scale for me is that, during a period in which production costs are rising, Barrick has publically committed to becoming more streamlined and disciplined. The company is most able to absorb rising costs, while simultaneously taking a portfolio approach and evaluating each asset against the overall benefit to the company. Given the backdrop of the global macro environment and, despite an apparently strong jobs report, Barrick should be considered for your core portfolio.
