(Bloomberg) — Gold prices fell to their biggest drop in more than two years after a surprisingly strong key U.S. jobs report dashed hopes that the Federal Reserve could soon start cutting borrowing costs.
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Treasury yields and the dollar surged after the U.S. government’s May jobs report showed job growth beat expectations and wages rose.Gold fell 3.1%, its biggest drop since March 2022, and base metals also fell.
“The strong jobs data has put a big damper on expectations of a rate cut, which rose last week,” said Ole Hansen, head of product strategy at Saxo Bank AS. “Higher interest rates are needed to dampen strong wage growth and employment, but these numbers have dampened expectations of an early rate cut.”
Fed officials have said they need more evidence that inflation is easing toward the central bank’s 2 percent target before considering when to cut rates, while investors want assurances of a soft landing to justify a cut in U.S. rates. Lower borrowing costs typically boost the price of gold, which doesn’t accrue interest.
After surging to a record high of over $2,450 an ounce, gold prices are trading in a fairly tight range amid uncertainty over the trajectory of Fed interest rates, with swaps traders no longer fully pricing in a rate cut before December.
Among non-ferrous metals, copper fell 3.9% to its lowest since May 2, while zinc posted its biggest intraday drop since October 2022.
China’s waning appetite
Gold was already falling early on Friday after data showed China’s central bank didn’t buy any gold last month, ending a massive 18-month gold-buying boom that had driven prices of the precious metal higher.The People’s Bank of China has been building up its reserves since November 2022 and had led a buying rush by global central banks amid rising geopolitical tensions.
“My first thought is that China, the main driver of gold’s price rally over the past year, isn’t done buying gold yet,” Hansen said.The pause suggests China fears it could be paying record high prices.
The People’s Bank of China’s demand for gold comes as the world’s second-largest economy seeks to diversify its reserves and hedge against a weakening currency. Purchases by global official institutions hit a record high in the first quarter, with China the biggest buyer, according to the World Gold Association.
There were signs that high prices were dampening Chinese demand: The People’s Bank of China purchased just 60,000 troy ounces of gold in April, down from 160,000 ounces in March and 390,000 ounces in February, while Chinese imports in April fell 30% from the previous month.
The risk for gold bulls is that China’s voracious appetite for gold makes the precious metal vulnerable to potential shifts in demand.
The initial price reaction “looks a bit technical,” said Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney. “I’d be surprised if this announcement signals anything other than a pause in the overall trend of continued public sector demand.”
In New York, spot gold was trading at $2,309.23 an ounce as of 12:20 p.m., down 2.8% from the previous day’s close. The S&P/TSX Composite Gold Index fell as much as 5.2%. Silver, platinum and palladium all fell, with silver posting its biggest intraday drop since August 2021.
–With assistance from James Poole and Andrew Janes.
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