Gold Drops 3% Despite Weak Payrolls as Fed Hawkishness Persists

The U.S. labor market delivered a major surprise last Friday, with nonfarm payrolls rising by just 29,000 in September, far below economists' expectations of 90,000. The August figures were also revised down from 162,000 to 133,000, and the unemployment rate climbed to 4.2%, exceeding forecasts of 4.1%. Initially, gold prices spiked over 1% as investors scaled back bets on Federal Reserve rate hikes. However, the rally was short-lived as U.S. Treasury yields rebounded, the dollar strengthened, and gold turned negative.

Analysts note that gold's near-term outlook hinges on the Fed's tolerance for labor market weakness while combating inflation. The weak jobs report reduced the likelihood of an October rate hike but didn't alter the Fed's broader hawkish stance. The 10-year Treasury yield rose to 5.281%, its highest since 2002, while the 30-year yield hit 5.6321%, marking the fifth straight weekly gain for the 10-year yield.

Gold faces persistent headwinds from a strong dollar and elevated Treasury yields, which increase its opportunity cost as a non-yielding asset. Since February, geopolitical tensions have pushed gold down over 20%, as markets anticipate prolonged high rates due to conflict-driven inflation. Fed Chair Wash has emphasized monetary policy independence, despite calls from former President Trump to cut rates. Recent inflation data and dissent within the Fed have tempered expectations of an October hike.

Investors will scrutinize the Fed's September meeting minutes for clues on future policy direction. While gold bulls remain cautious due to the Fed's hawkish stance, the minutes could provide insights into the balance between tightening and easing pressures.