-- Posted 12 January, 2010 | | Discuss This Article - Comments:

There isn't a single commodity, equity, or security that escapes the influence of the unemployment rate.  Typically, unemployment has lasting implications on investments, but for metals, it may be positive rather than negative.

Employment History

Every decade from 1940 – 2000 has experienced employment gains greater than 20%.  A strong manufacturing sector during the middle of the 20^th century demanded so much labor that it was able to absorb an entire baby-boom generation following the end of World War II.  In fact, disregarding the 40% employment gain during the war period, the 1950s added an additional 25%, soaking up all of the then laid off combat troops.  The 1960s then saw another huge gain in employment at 33%, and each subsequent decade all posted 20% growth in employment. 

However, when you turn to the first decade of the 21^st century, you find that the growth in employment was just about 1%, or 20 times less than the decade before.

Employment and Microeconomics

Employment has a dramatic impact on the micro view of economics.  When employment is growing and scores of workers are being hired rather than fired, the economy can withhold greater amounts of government intervention than is typical.  One of these thwarted interventions is inflation.  When velocity of money is high and there is healthy circulation of money, inflation is often negated.  However, in times when productivity and employment are weak, inflation has a greater impact on consumer prices. 

Think back to the high inflation rates during the 1970s (a period during which employment actually expanded when evaluating the entire decade).   The central bank, in an effort to soak up excess credit, sent interest rates to their highest point in history.  However, it didn't negatively affect the economy.  Future homeowners were still borrowing, the American auto industry was still buzzing along, and as a whole, the outlook remained positive.

Fast Forward 40 Years

Forty years after the inflationary 1970s, we are in a deep recession with higher inflation on the horizon.  The slack in labor suggests that the government and central bank cannot immediately cease spending or inflating, creating an environment in which absorbing extra credit would break the system.  Instead of calling back all the extra credit, the government will have to continue to inflate to replace job losses in the private sector in an effort to achieve the Keynesian desire for 100% employment.

What Unemployment Means for Metals

Commodities, particularly precious metals, are one of the few assets that will increase in value as the economy sours.  Since the government is currently between a rock and a hard place, unable to curb inflation without destroying the labor market, inflation is assured.  A perfect storm of private and public sector debt issuance will likely prompt the Fed to keep rates low, and in fact, the Fed will possibly continue its plan to quantitatively ease the credit markets.  With all the stars aligning and unemployment rising, there has never been a better time to buy silver as a hedge against inflation.  Those who own physical metals are ahead of the curve.

Dr. Jeffrey Lewis