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Gold price down 2% as strong US economic data puts traders on defense

Gold taking a short-term blow. Stock image.

Gold retreated from its highest level in almost five months on Thursday as strong US employment and service sector data propelled the dollar higher and boosted investors’ expectations that the Federal Reserve may reignite tapering talks.

Spot gold declined more than 2% to $1,867.69 per ounce by 11:30 a.m. ET, near its lowest level since May 20. US gold futures were also down by 2%, trading at $1,871.30 per ounce on the Comex.

[Click here for an interactive chart of gold prices]

Signaling a strong labor market recovery, new US jobless claims dropped below 400,000 last week, while private employers stepped up hiring in May, the ADP National Employment Report showed.

Meanwhile, a measure of US services industry activity increased to a record high in May.

“We’re coming out of the woods here, the data is getting better, there are some inflation issues that could put a damper on things, but we have turned the corner,” Bob Haberkorn, senior market strategist at RJO Futures, wrote in a note to Reuters:

“The better than expected data has put traders on the defense, they’re preparing for possible statements from the Federal Reserve on tapering or higher rates although not immediately.”

The dollar index jumped 0.7% on Thursday, making gold expensive for other currency holders, while US bond yields also ticked up.

Bullion has stabilized near $1,900 in recent days amid growing demand for the haven asset, aided by signs of accelerating consumer prices and the risk of an uneven economic recovery.

Traders will be watching Friday’s US nonfarm payrolls report for May for further clues on the strength of the labor market, and whether growth will spur inflation that could prompt governments and central banks to reduce stimulus.

On Wednesday, Philadelphia Fed President Patrick Harker told the Wall Street Journal it is appropriate “to slowly, carefully move back” on bond purchases at a suitable time.

Fed officials have said they will begin scaling back bond buying when the economy has made “substantial further progress” toward their goals, a condition many Fed-watchers believe will be met later this year.

“Investors are shifting their focus to inflation from potential tapering risks,” Suki Cooper, a precious metals analyst at Standard Chartered Bank, said in a Bloomberg TV interview. “The Fed’s view of inflation as transitory has helped lift gold prices higher,” she added.

BlackRock CEO Larry Fink also said the potential for a spike in inflation may be underestimated.

“A much stronger than expected ADP result suggesting a similar bounce back in payrolls tomorrow after last month’s terrible print has driven the dollar notably higher and triggered long liquidation in gold under $1,890,” said Tai Wong, head of metals derivatives trading at BMO.

“The $1,850-60 support is significant and should hold in gold,” Wong added.

(With files from Bloomberg and Reuters)