Gold price takes US jobs in stride to 2-year high

On Friday, gold recovered from an early drop in response to a much better than expected US jobs report and stronger US dollar as the metal builds a base above the $1,350 an ounce level first breached this month.

On Friday gold futures in New York for delivery in August, the most active contract, fell to a low of $1,336.30 shortly after the non-farm payroll numbers data was released, but quickly shot back up to close the day a couple of dollars higher at $1,364.50.

On Wednesday gold closed at a two-year high of $1,366 and year to date the metal remains higher by 28% or nearly $300 an ounce.

Friday's reaction on the gold market suggests another US rate hike – so long in the making – is now baked into the price

According to the latest figures from the Department of Labor 287,000 jobs were created in June – at least 100,000 more than analysts had forecast – and up sharply from the six-year low rate recorded in May which first sparked the month-long rally in the gold price.

A steady increase in average hourly wages and number of hours worked also strengthens the hawks on the Federal Reserve's decision making committee who want to raise rates sooner rather than later this year.  But at the moment futures markets only see a 23.4% probability of a rate hike when the Fed meets mid-December, according to the CME Group’s FedWatch tool.

What has now almost become a rule of thumb is that rising real interest rates raises the opportunity costs of holding gold because the metal provides no yield and therefore the price should decline.

Higher rates also boost the value of the dollar which usually move in the opposite direction of the gold price.

Since the global financial crisis the relationship between interest rate expectations and the gold price has only become tighter with some analysts believing the metal can serve as an early warning system of both the direction and magnitude of the move in rates.

But Friday's reaction on the gold market suggests another US rate hike – so long in the making – is now finally baked into the price and that traders are focusing on the backdrop of negative interest rates in many developed economies, worries about China and global economic growth and geopolitical uncertainty surrounding Britain's exit from the EU.