The positive trend continues as the U.S. unemployment rate ticked down for the first time in many months.
The unemployment rate dropped to 10 per cent for the month of November, a slight improvement on the 10.2 per cent posted in October. Eleven-thousand jobs were lost, the best reading since December 2007, and a number that caught many by surprise, causing a spike in the U.S. dollar and a quick sell off in the price of gold.
The market continues to rise on the back of these more positive numbers. However, perhaps some of the more “crowded trades” of this past year — such as the shorting of the U.S. dollar and the buying of gold — which has driven the market to recent annual highs may be slowing down.
The major North American indices are all up more than 50 per cent since the March lows, with much of the gains being driven by commodities helped by a weak U.S. dollar. In my opinion, the trend has been simple to follow until now. A weak U.S. dollar, and the market would rise. A strong U.S. dollar, and the market would fall. However if the U.S. economy can show some stability and begin to show job creation, the dominant trend of 2009 may not work any longer.
If investors can start to gain confidence in the U.S. economy then they should, over time, gain confidence in the U.S. dollar. One month’s data does not change a trend, however, if the November unemployment number can be followed by good December and January numbers, then the Federal Reserve may be closer to executing an exit strategy sooner than most would have anticipated.
At this point however, the Fed will still be on hold with respect to increasing interest rates. I am sure the Fed does not want to make the mistake of raising rates too early and hurting any possible economic recovery. Thus it is my opinion that we still have at least another quarter before the talk turns to actually raising U.S. interest rates.
Precious metals, and in particular gold, has been a great asset class to be invested in over the last few years. It seems like many investors have been asking whether they should own gold in their portfolio. We have all heard of the predictions of gold going to $2,000 per ounce, or even higher. This reminds me of those that predicted the price of oil would rise to $200 per barrel by the end of 2008. We all know what happened with that prediction.
My main message regarding gold and other precious metal investments is to be careful. If the U.S. dollar begins to strengthen, there could be a mass exodus from the yellow metal. Just as investors have been buying gold quite rapidly over the last year, many could begin to sell just as quickly, and the price for gold and other precious metals could fall sharply. I am not saying this will happen today, but investors need to be cognizant of this possibility.
As investors, we still need to try to take advantage of our current low interest rate environment. As I have said many times, it is the number one factor driving markets higher. After receiving the latest U.S. unemployment numbers, we can clearly see that interest rates will not be this low forever and things will be different when rates begin to rise at some point next year. I continue to favour sectors that historically show leadership coming out of recessionary times. Sectors such as oil, technology and financials should continue to do well with selective infrastructure investments which can be used to take advantage of ongoing government stimulus programs.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
