US jobs knock gold price

On Friday, the reaction on gold markets was swift in response to a much better than expected US jobs report and a stronger US dollar, with the metal falling back from two-year highs.

Gold futures in New York for delivery in December, the most active contract, fell to a low of $1,342.10 shortly after the non-farm payroll numbers data was released, down nearly 2% from Thursday's close. Earlier this week closed at a two-year high near $1,380 and year to date the metal is still up 26% or nearly $300 an ounce.

According to the latest figures from the Department of Labor 255,000 jobs were created in July – compared to the 185,000 analysts had forecast. 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.

US jobs knocks gold price

Source: Capital Economics

At the moment futures markets only see a 18% probability of a rate hike when the Fed meets in September and a 47% chance at the mid-December meeting (up from 32% before), according to the CME Group’s FedWatch tool.

US Treasury yields and the gold price have a strong negative correlation and as the graph shows the two moved in tandem once again. Capital Economics is a note following the jobs numbers said "while the prospect of earlier hikes in US rates is a downside risk for the gold price, we expect a combination of looser monetary policy in the euro-zone, the UK and Japan and building inflationary pressures in the US to continue to boost the price of gold."

The US dollar also has close inverse relationship to commodity prices and gold. The index jumped to above 96 against the currencies of the country's major trading partners after the payroll news. The dollar has nevertheless weakened 2.4% over the past year after  briefly spending time above 100 in March and November last year. The last time the currency topped 100 for a sustained period was in the early 2000s.

Today's level compares to a record low of 71.6 in April of 2008 and a record high of 164.72 in February 1985 when the price of gold bottomed at $284.25 an ounce.