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Gold futures surged on Wednesday as Treasury yields declined in response to disappointing U.S. private payrolls data, sparking expectations of a potential interest rate cut by the Federal Reserve in September.
Following the release of data from ADP showing a slowdown in hiring, with only 152K jobs added in May compared to a revised 188K jobs in April, U.S. Treasurys saw significant gains.
Market Reaction
The two-year Treasury yield dropped by 4 bps to 4.73%, marking a 25 bps decrease over the last five sessions, the longest decline in four years. Additionally, the 10- and 30-year rates hit their lowest levels since March, finishing at 4.29% and 4.44% respectively after falling for five consecutive trading days.
Traders are now pricing in a ~67% likelihood of a Fed rate cut by September, up from less than 50% the previous week, according to the CME FedWatch Tool.
Impact on Gold Prices
Analysts point to upcoming U.S. economic reports, such as the non-farm payrolls report scheduled for Friday, as potential influencers of gold prices in the coming days.
SP Angel analysts anticipate that exchange-traded funds (ETFs) will be the main driver of bullish momentum in gold, especially if U.S. government yields continue to decline, attracting safe-haven investors to the precious metal.
Front-month Comex gold for June delivery rose by +1.2% to $2,354.10/oz, while front-month June silver increased by +1.5% to $29.948/oz.
ETFs involved in gold trading include: (NYSEARCA:GLD), (NYSEARCA:GDX), (GDXJ), (IAU), (NUGT), (PHYS), (GLDM), (AAAU), (SGOL), (BAR), (OUNZ), (SLV), (PSLV), (SIVR), (SIL), (SILJ)
Global Central Bank Activity
The World Gold Council reported a significant jump in net purchases of gold by global central banks, from 3 metric tons in March to 33 metric tons in April. This demonstrates continued strong appeal for gold despite high prices in the market.
According to World Gold Council chief market strategist John Reade, U.S. rate cuts are expected to attract Western gold investors back to the market. Although elevated interest rates have dampened investor interest in gold in Europe and the U.S., central bank purchases, particularly from emerging markets, have provided support to gold prices.
