Has the gold price finally got the rate monkey off its back?

An inline US payroll report which makes a rate hike next month more of a certainty lifted the gold price to within sight of the psychologically important $1,100 an ounce level on Friday.

In massive volumes, gold for delivery in December – the most active futures contract – fell to a low of $1,081.40 shortly before the release of the data.

But after a series of huge buy orders gold shot up to $1,098.90 an ounce by mid-morning. Shortly before the close gains were pared to $1,094.60.

According to the latest figures from the Department of Labor 215,000 jobs were created in July while the jobless rate of 5.3% stayed at its lowest level since the financial crisis.

While not stellar numbers, a steady increase in average hourly wages and number of hours worked strengthen the hawks on the Fed's decision making committee who want to raise rates at its September meeting.

It would be the first US rate hike since June 29, 2006 (incidentally a day the gold price jumped 3%).

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 – up 20% in a year – 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 a rate hike – so long in the making – is now finally baked into the price.

A rate hike will also remove uncertainty in the market and encourage focus on fundamentals in the industry characterized by declining supply and robust physical demand.

In a recent  note from Capital Economics, an independent research house, said that while the negative relationship between rates and gold is real "this link can be overdone":

"Note first that it is a question of degree. An eventual rise in annual US interest rates to, say, 4%, would not have a huge impact on the relative attractiveness of holding gold, given its value as insurance against extreme events and the scope for prices to move by significantly more than 4% in a relatively short period.

"Suppose, for example, that the Fed is tightening policy because US inflation is picking up. In this case there may actually be increased demand for gold as an inflation hedge.  Alternatively, suppose that Fed tightening triggers a sell-off in other asset markets, including equities as well as bonds. This may well increase demand for gold as a safe haven."

And 4% rates remain a long way off, if the Fed gets there at all – consensus forecast for US short term interest is a climb to 3%. And only by the end of 2017.