Gold fell the most in more than two years as surprise strength in a key US jobs report dashed hopes that the Federal Reserve will be able to start lowering borrowing costs soon.
Treasury yields and the dollar surged after the US government’s May employment report showed job growth exceeded expectations and wages were hot. Bullion slumped as much as 3.1%, the most since March 2022, while base metals also tumbled.
“A strong jobs report reversed a great deal of the rate cut excitement that had built during the past week,” said Ole Hansen, head of commodity strategy at Saxo Bank AS. “This report removes hopes for earlier rate cuts, with sticky wage growth and robust employment in need of high rates to cool.”
Fed officials have said they need more evidence that inflation is easing toward the central bank’s 2% target as they consider when to cut rates, while investors are looking for conviction of a soft landing that would justify US rate cuts. Lower borrowing costs typically boost gold, which doesn’t pay interest.
After surging to a record above $2,450 an ounce, bullion has traded in a fairly narrow range amid the uncertainty over the Fed’s rate trajectory. Swap traders now no longer fully price in a rate cut before December.
Among base metals, copper dropped as much as 3.9% to its lowest since May 2, and zinc saw its biggest intraday decline since October 2022.
China’s Fading Appetite
Gold was already trading lower earlier Friday as data showed that China’s central bank didn’t buy any gold last month, ending a massive buying spree that ran for 18 months and helped drive the precious metal’s rally. The People’s Bank of China had been stocking up its reserves since November 2022, leading a flurry of purchases by the world’s central banks amid rising geopolitical tensions.
“My initial thought is that China, a major driver of the gold rally in the past year, is nowhere near done buying gold,” Hansen said. The pause shows that they are balking at the prospect of paying record-high prices.
The PBOC’s demand for bullion has come as the world’s second-biggest economy seeks to diversify its reserves and guard against currency depreciation. First-quarter purchases by the world’s public institutions were at record levels, with China the biggest buyer, according to the World Gold Council.
There had been signs that China’s demand was cooling as higher prices took their toll. In April, the PBOC bought only 60,000 troy ounces, down from 160,000 ounces in March, and 390,000 ounces in February. The country’s imports in April, meanwhile, slipped 30% from the previous month.
The risk for gold bulls is that China’s voracious appetite for bullion has left the precious metal vulnerable to any potential shift in demand.
The initial price reaction “looks a bit technical,” said Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney. “It would be surprising if the announcement represents anything other than a pause in the general trend of ongoing official sector demand.”
Spot gold was trading at $2,309.23 an ounce by 12:20 p.m. in New York, down 2.8% on the previous close. The S&P/TSX Composite Gold Index slid as much as 5.2%. Silver, platinum and palladium all tumbled, with silver seeing the biggest intraday drop since August 2021.
