Gold prices fell on Friday after some investors wagered that the strong U.S. employment report increases the likelihood that the Federal Reserve will soon tighten monetary policy.
The most actively traded gold futures contract, for December delivery, fell $16.50, or 1.5%, to settle at $1,087.70 a troy ounce on the Comex division of the New York Mercantile Exchange. This was the lowest close since Aug. 5.
Prices have stumbled in recent days after Fed officials surprised traders by signaling higher rates remained a possibility for 2015. While some investors had previously wagered that the U.S. central bank would delay raising rates until 2016 in response to the recent weak economic data, they shed gold holdings in response to the hawkish communique.
The argument for higher interest rates got another boost on Friday, when Labor Department data showed the U.S. economy added jobs at the fastest pace this year in October. Nonfarm payrolls rose by 271,000 new jobs last month, surpassing the 183,000 gain economists predicted. The unemployment rate, collected through a separate survey, ticked down to 5.0%, from 5.1% in September, in line with economists’ expectations.
“It’s very hard to look at this report and think that the Fed doesn’t move forward on it, and for the metal markets it’s not bullish,” said Ira Epstein, a broker with Linn & Associates in Chicago.
Gold is expected to struggle once rates climb because it doesn’t pay interest and costs money to store, making it less appealing than Treasury bonds in an environment of rising rates. The monetary-policy shift is also expected to boost the dollar, adding to gold’s woes. Dollar-denominated gold futures become more expensive for foreign buyers when the buck strengthens.
“It’s not a surprise to see gold sell off so strongly because the thought that the Fed will raise rates will further strengthen the dollar,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
The Wall Street Journal Dollar Index rallied to 90.56, the highest level since December 2002, in response to the U.S. employment report.
The likelihood of a December interest rate increase by the Fed surged to 70% in recent trading, from 58% prior to the jobs report, according to Fed funds futures data from the CME Group. Investors use federal funds futures to wager on central-bank policy moves.
“This looks bearish for gold between now and the next Fed meeting...a quarter-point rate increase looks in the cards for their December meeting,” said Bob Haberkorn, a senior commodities broker with RJO Futures in Chicago.
Source: http://www.wsj.com/articles/gold-lower-on-expectations-of-fed-rate-rise-1446808380
