Why is gold plunging after strong US jobs data?

Gold prices slipped on Monday as a surprisingly strong US jobs report revived expectations that the Federal Reserve could raise interest rates this month, putting the focus firmly on this week’s inflation data.

Spot gold fell 0.5% to $4,405.47 an ounce in early Asian trading after losing about 1% on Friday. US gold futures for December delivery dropped 0.5% to $4,452.20.

The pressure followed data showing employers added 162,000 jobs in August, while unemployment held at 4.1%.

The payroll increase was well above market expectations and marked a sharp improvement from the subdued hiring seen earlier in the summer.

Strong payrolls reopen the September rate debate

The jobs report changed the near-term policy calculus because it reduced concerns that tighter monetary policy was already causing serious damage to the labour market.

July payrolls were revised to a 21,000 increase from an initially reported 23,000 decline, while June was also revised higher.

Combined employment gains for the two months were 55,000 stronger than previously estimated, according to the Bureau of Labor Statistics.

That leaves the Fed with more room to concentrate on inflation.

Futures markets were assigning roughly a 58% probability to a rate increase at the September 15-16 meeting on Monday.

For gold, higher rates are generally a headwind because bullion generates no income.

Peter Grant, senior metals strategist at Zaner Metals, told The Wall Street Journal that persistently firm inflation data this week could strengthen expectations for another Fed increase, creating additional pressure on the metal.

Inflation data become the next test for gold

Attention now moves from employment to prices.

The August producer price index is scheduled for Thursday, September 10, followed by the consumer price index on Friday, September 11, the BLS calendar shows.

The stakes are high after July headline CPI rose 3.4% from a year earlier, while core inflation stood at 2.5%. Both remain above levels consistent with the Fed’s 2% target.

Independent analyst Tai Wong, cited by FXStreet, said the strength of the payrolls report had made a September increase significantly more plausible unless CPI delivers a weak reading.

That makes Friday’s inflation number potentially more important for gold than the jobs report itself.

Softer inflation could pull Treasury yields lower and revive bullion demand, while another firm reading would strengthen the case for tighter policy.

Geopolitical risks still provide a floor

Gold’s longer-term support has not disappeared, particularly as tensions between the US and Iran continue to keep investors alert to geopolitical shocks.

There is also a complicated link through energy markets.

Higher oil prices can increase safe-haven demand, but they can simultaneously strengthen inflation expectations and encourage central banks to keep rates higher.

That tension has left gold elevated despite its recent retreat.

Other precious metals also weakened on Monday. Spot silver slipped 0.2% to $66.03 an ounce, platinum fell 0.8% to $1,805.53 and palladium declined 0.7% to $1,396.08.