Gold prices experienced their steepest one-day drop in over two years on June 7, 2024, after a confluence of negative factors. A surprisingly strong US jobs report and a pause in gold buying by China’s central bank rattled investor confidence and triggered a sell-off.
Robust US Jobs Report Dampens Rate Cut Bets
The US Labor Department’s May jobs report, released on June 7, exceeded market expectations. The data revealed robust job growth and signs of persistent wage inflation. This positive economic data led to a surge in Treasury yields, the interest rates on US government bonds. The US dollar also strengthened in response to the data.
Previously, investors had anticipated an earlier-than-expected interest rate cut by the Federal Reserve, the central bank of the United States. Lower interest rates typically make gold, a non-interest-bearing asset, more attractive to investors. However, the strong jobs report indicated the US economy might not need a rate cut as soon as anticipated. This shift in expectations triggered a sell-off in gold futures contracts, causing the price to plummet.
“A strong jobs report dampened hopes for an imminent rate cut by the Federal Reserve,” explained Ole Hansen, a commodity strategist at Saxo Bank. “Since gold doesn’t offer any interest payments, a robust jobs report suggesting the need for continued high rates weakens the appeal of gold for investors.”
China’s Buying Halt Throws Cold Water on Gold Rally
Adding fuel to the gold price decline was the news that China’s central bank, the People’s Bank of China (PBOC), did not purchase any gold in May. This marked the end of an 18-month buying spree by the PBOC, which had been a significant driver of the gold price rally in 2023 and early 2024.
Analysts believe China’s pause in gold buying may be due to record-high gold prices. The PBOC had been accumulating gold reserves to diversify its holdings and hedge against potential currency depreciation. However, with gold prices reaching new highs, China may be taking a wait-and-see approach before resuming purchases.
Market Reaction and Lingering Concerns
The initial price drop in gold was attributed to technical factors by some analysts. However, the bigger concern for gold bulls, investors who believe gold prices will rise, is the potential for a sustained decline if China’s diminished appetite for the precious metal persists.
“China’s significant demand for gold has been a key factor in the recent rally,” said Nicholas Frappell, of ABC Refinery. “While this pause may be temporary, it raises concerns about the long-term outlook for gold prices, especially if China decides to reduce its holdings.”
The spot price of gold, which reflects immediate delivery, fell 2.8% to $2,309.23 per ounce by midday trading in New York on June 7. Other precious metals, including silver, platinum, and palladium, also experienced significant price drops, mirroring the decline in gold.
Source: Mining.com
