- US Treasury yields pulled back on Friday after data revealed softer-than-expected employment in September.
- Traders expect the Fed to pause in October.
- Experts believe factors like central bank purchases will keep supporting gold.
Gold prices eased on Wednesday as elevated yields hurt demand for the yellow metal. Treasury yields have remained near multi-decade highs despite a decline in Fed rate hike expectations. A poor employment report on Wednesday increased chances that the Fed will keep interest rates unchanged in October.
Spot gold (Source: Bloomberg)
Bullion has collapsed in recent days due to the rally in Treasury yields amid inflation worries. Global yields have risen sharply due to geopolitical tensions and a surge in oil prices. Talks between the US and Iran at the UN failed to yield a peace deal. Instead, Trump said the bombs would return after the US midterm elections in November.
The prospects of a prolonged war increased inflation concerns, sending rate hike expectations higher around the globe. Notably, traders were pricing a 75% chance of a hike in the US in October. Other major central banks have also shifted to more hawkish outlooks, given the ongoing Middle East tensions.
However, US Treasury yields pulled back on Friday after data revealed softer-than-expected employment in September. According to the non-farm payrolls report, the economy added 29,000 jobs, compared to the forecast of 89,000. Moreover, the unemployment rate increased to 4.2%, above the estimate of 4.1%.
The report led to a repricing of Fed rate hike expectations, with traders now expecting a pause in October. Gold prices rose but ended the day down. Underlying fundamentals still point to higher oil prices if the war in Iran continues. If this is the case, central banks will remain hawkish, and yields will continue climbing.
As yields rise, the opportunity cost of holding gold increases. Therefore, traders flock to yielding assets like the dollar. The rally in the dollar has also weighed on gold. A stronger dollar makes the yellow metal more expensive for foreign buyers.
Nevertheless, experts believe factors like central bank purchases will keep supporting gold prices. At the same time, physical demand in countries like China has remained high. Market participants are also looking forward to the US CPI report for more clues on Fed policy. If inflation is hotter than expected, rate hike bets will increase. On the other hand, if inflation is soft, it will ease pressure on the Fed to hike interest rates.