Jobless Claims

What does someone do when he or she loses a job? The range of options is quite wide. Some people get drunk and curse the boss, other need to talk with a life companion of family. The smart reaction is, of course, to look for a new job, but if there are no vacancies at the moment, an option worth considering is to apply for the unemployment benefit.

Each Thursday, at 8:30 a.m. ET, the U.S. Department of Labor publishes a report, which shows how many people filed for unemployment benefits in the previous week. These unemployment insurance claims include two categories: initial jobless claims, which comprises of people filing for the first time, and continuing, which consists of unemployed people who have been receiving unemployment benefits for a while.

Because the latter is published one week later, investors focus on the initial jobless claims as a gauge of the US labor market. The indicator is intuitive: when more people file for unemployment benefits, fewer people have jobs, and vice versa. This is why the jobless claims are a popular leading indicator on the state of the employment situation. However, this creates a problem: if the initial jobless claims are used to forecast changes in the employment and unemployment, so why should we not monitor the unemployment rate directly?   

Let’s take a look at the chart below to figure out how the measure performed during the last two recessions. First of all, it’s a very volatile data, or there is a lot of noise in that weekly data series – this is actually the analysts that often track the four-week average of jobless claims as well.

Second, the initial jobless claims tend to reach a trough several months before an economic recession – and when it begins, the indicator rise sharply. For example, as the chart below shows, the unemployment rate reached its lowest level prior to the outbreak of the Great Recession in May 2007, seven months before the official start of the recession, and earlier in April 2000, eleven months before the 2001 recession.

Chart 1: Initial jobless claims from January 1998 to February 2019 (index, when December 2007 = 100).

Initial jobless claims from January 1998 to February 2019 (index, when December 2007 = 100)

Third, as of the end of February 2019, the jobless claims are still in downward trend with the latest bottom reached in January 2019, so this data series does not indicate the upcoming recession (we would expect a bottom much earlier, and then the start of an upward trend, as it was the case prior to the last two recessions).

Jobless Claims and Gold

What is the relationship between the initial jobless claims and gold? Well, this data series is countercyclical, so it’s negatively correlated with the GDP over the business cycle. It means that the initial jobless claims increases as the economic activity slows (and more people file for unemployment benefits) and decreases when the economy expands (when fewer people need unemployment benefits). Hence, the initial jobless claims should be theoretically 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 2: US initial jobless claims (red line, left axis, number of claims), 4-four weeks average of initial jobless claims (green line, left axis, number of claims) and the price of gold (yellow line, right axis, London P.M. fixing) from January 1972 to January 2019

US initial jobless claims 4-four weeks average of initial jobless claims and the price of gold from January 1972 to January 2019

As one can see, there is actually no clear long-term relationship between the gold price and the jobless claims. Although both data series moved in tandem during the Great Recession, it was rather an exception than a rule. The correlation between the initial jobless claims and the price of gold is merely -0.08, so it’s even lower than between the gold prices and the unemployment rate. Hence, our analysis suggests that although the jobless claims may herald recession, is not a particularly precise indicator for the precious metals investors and it needs to be supplemented by other tools in order to make detailed predictions about the gold price.