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Gold falls 1% as robust U.S. jobs report bolsters case for Fed rate hike

CommoditiesAug 05, 2016 01:34PM ET
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Gold plunged by more than $20 an ounce on Friday to close below $1,345 -- Gold fell sharply on Friday amid a resurgent dollar, as the U.S. labor market added more than 250,000 jobs for the second consecutive month in July, increasing the probability that the Federal Reserve could raise short-term interest rates before the end of the year.

On the Comex division of the New York Mercantile Exchange, Gold for December delivery traded between $1,342.70 and $1,370.95 an ounce before settling at $1,344.75, down 22.65 or 1.66% on the session. With the sharp declines, Gold suffered its worst one-day loss in three weeks and erased all of its gains from earlier this week. The precious metal is still up by more than 6% since the historic Brexit referendum in late-June and has increased by nearly 27% since the start of the year.

Gold likely gained support at $1,313.80, the low from July 25 and was met with resistance at $1,391.40, the high from March 14, 2014.

On Friday morning, the U.S. Department of Labor said in its monthly employment report that the economy added 255,000 nonfarm payrolls in July, topping the high end of analysts' expectations by 70,000 and erasing lingering concerns that June's robust report may have been a fluke. Adding further optimism to July's reading, the labor participation rate ticked up by 0.1 to 62.8% while the unemployment rate remained flat at 4.9%.

Within the report, the gains were driven by increases in professional & business services and temporary help, which rose by 70,000 and 17,000 respectively. Hiring in the construction and retail industries, which have lagged throughout the year, also picked up last month each adding at least 14,000. Meanwhile, employment in government and financial activities edged up, offset slightly by declines in the mining sector. Notably, average hourly wages surged by 0.3% in July and are now up by 2.6% over the last year. For the month, average hourly earnings of private-sector production and nonsupervisory employees rose by seven cents to $21.59. Analysts expected to see a 0.3% increase in average hourly earnings, one month after wages inched up by 0.1% in June.

Following the release, the CME Group's (NASDAQ:CME) Fed Watch tool placed the odds of a September rate hike by the Federal Open Market Committee (FOMC) at 18%, up considerably from 9% over the previous session. The chances of a December rate hike from the FOMC also increased to 39.7% on Friday, up from 29.4% a day earlier. There is also a 6.7% chance the FOMC will approve two rate hikes of 25 basis points each before the end of the year, the CME Group added.

Earlier this week, Chicago Fed president Charles Evans said it could be appropriate to raise rates once this year if economic conditions continued to improve, while Atlanta Fed president Dennis Lockhart failed to take a September rate hike off the table. Any rate hikes by the Fed this year are viewed as bearish for Gold, which struggles to compete against high-yield bearing assets in rising rate environments.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.40% to an intraday high of 96.50. The index is still down by more than 1% since hitting four-month highs of 97.62 early last week.

Dollar-denominated commodities such as Gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for September delivery plummeted 0.636 or 3.11% to 19.807 an ounce.

Copper for September delivery fell 0.015 or 0.69% to 2.159 a pound.

Gold falls 1% as robust U.S. jobs report bolsters case for Fed rate hike

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