Gold prices slumped in Asian trade on Monday, as a combination of robust US labor market data and hawkish comments from the Federal Reserve dampened expectations of early interest rate cuts. The dollar surged to a near two-month high, while Treasury yields also rose, putting pressure on the precious metal.
US Jobs Report Beats Expectations, Boosts Dollar
Gold prices were hit by a stronger-than-expected US nonfarm payrolls report for January, which showed that the world’s largest economy added 467,000 jobs, beating the consensus estimate of 160,000. The unemployment rate also fell to 3.6%, the lowest level since 1969.
The report indicated that the US economy remained resilient despite the ongoing trade war with China and the partial government shutdown, which lasted for 35 days and ended on Jan. 25. The report also suggested that the labor market was tight and that wage growth was picking up, which could fuel inflation and consumer spending.
The report boosted the dollar, which rose to 96.26 against a basket of six major currencies, its highest level since Dec. 17. A stronger dollar makes gold more expensive for holders of other currencies, reducing its appeal as an alternative asset.
Fed Chair Powell Reiterates Patient Stance, Dents Rate Cut Bets
Gold prices were also weighed down by hawkish remarks from Fed Chair Jerome Powell, who said in a CBS interview on Sunday that the central bank would be patient and prudent in adjusting its monetary policy this year, and that the US economy was in a good place.
Powell reiterated the Fed’s stance that it was in no rush to change its interest rates, which are currently in a range of 2.25% to 2.5%, and that it would depend on the incoming data and the evolving risks. He also said that the Fed was close to ending its balance sheet reduction, which has been shrinking by $50 billion per month since October 2017.
Powell’s comments reduced the market expectations of early interest rate cuts by the Fed, which had been rising in recent weeks amid signs of slowing global growth and subdued inflation. The CME FedWatch tool showed that traders had almost completely priced out the possibility of a rate cut in March, and had sharply lowered the odds of a rate cut in May. Some analysts also said that they only expected the Fed to start cutting rates by June.
Lower interest rates tend to benefit gold, as they reduce the opportunity cost of holding the non-yielding metal. Higher interest rates, on the other hand, tend to hurt gold, as they increase the appeal of other assets, such as bonds and stocks.
Gold Finds Some Support from Safe Haven Demand amid Middle East Tensions
Despite the bearish factors, gold prices found some support from the increased demand for safe haven assets, amid the rising tensions and violence in the Middle East. The region has been plagued by instability and conflict, especially in Yemen, where a civil war has been raging since 2015.
In recent weeks, the situation has worsened, as the Houthi rebels, who control most of northern Yemen, have launched several attacks on Saudi Arabia and its allies, using drones, missiles and boats. Some of these attacks have targeted ships and oil facilities in the Red Sea, posing a serious threat to maritime security and navigation.
Gold is widely considered as a safe haven asset, as it tends to retain its value or even increase in times of geopolitical and economic uncertainty. Gold prices have also been supported by the ongoing trade dispute between the US and China, which has weighed on the global growth outlook and market sentiment.
Gold prices have largely held above the $2,000 an ounce level, and are still close to the record highs of $2,063.20 an ounce, reached on Jan. 4. However, the yellow metal faces strong resistance at the $2,050 an ounce level, and needs a fresh catalyst to break above it.
Copper Rises on Chilean Supply Worries, but Demand Concerns Limit Gains
Among other metals, copper prices rose slightly on Monday, amid worries over potential supply disruptions in Chile, the world’s largest producer of the industrial metal. Chile has been hit by deadly wildfires, which have burned more than 10,000 hectares of land and killed at least 15 people.
Copper futures for March delivery rose 0.2% to $3.8293 a pound, as traders feared that the fires could affect the copper mines and infrastructure in the country. Chile produces about a third of the world’s copper, and any supply disruptions could tighten the global copper market.
However, the gains in copper prices were capped by the persistent concerns over the slowing demand in China, the world’s largest consumer of the metal. China accounts for about half of the global copper demand, and its economic growth has been slowing down amid the trade war with the US and the domestic debt problems.
Copper prices have also been under pressure from the strengthening dollar, which makes the metal more expensive for buyers using other currencies. Copper prices have been trading in a narrow range of $3.70 to $3.90 a pound, and need a clear direction to break out of it.