Chart of the Week

A STRUCTURAL TAILWIND FOR GOLD

Demographic trends and technological advancements are reshaping labour markets, meaning the percentage of the working age population either employed or actively seeking work (the participation rate) may soon start trending lower again.

The chart below compares the US labour force participation rate (red line) with the Federal Reserve’s balance sheet (blue line). Significantly, the latter is inverted so declines in the blue line show the Federal Reserve’s balance sheet expanding (and vice versa).

Typically the two lines move in lockstep so a falling labour force participation rate usually triggers an expansion in the Federal Reserve’s balance sheet. This reflects monetary support being deployed (typically via the likes of quantitative easing, or QE) to counter the economic weakness.

An expanding Fed balance sheet also means more money is being printed which, in turn, speaks to fiat currency debasement. This usually brings gold’s status as a monetary hedge to the fore.

Interestingly, gold’s rally to record-breaking levels has unfolded despite the recent decline in the Fed’s balance sheet, but this masks the fact policymakers have been providing persistent “backdoor” liquidity support.

Any future fall in the labour force participation rate will heap pressure on the Federal Reserve to return to a more explicit QE-style program.

That would mean more money printing and more support for the gold price.