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James Hyerczyk
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Comex Gold

Gold futures surged last week because a drop in U.S. Treasury yields pressured the U.S. Dollar. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, while a weaker U.S. Dollar tends to drive up foreign demand for dollar-denominated gold.

Last week, June Comex gold settled at $1831.30, up $63.60 or +3.60%.

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The catalysts behind the movement in Treasury yields and the dollar were dovish chatter from Federal Reserve officials and a weaker-than-expected U.S. jobs report.

Over the near-term, it will be hard to convince a number of the dovish Fed officials to make any changes to policy before all the boxes are checked, but the fallback from the weaker-than-expected employment report can be easily offset as soon as this week with higher-than-expected consumer inflation data, or next month with a blowout Non-Farm Payrolls report.

As far as yields are concerned, they already bounced back from Friday’s plunge which suggests the move may have been an overreaction to the jobs report miss.

Friday’s Recap

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Non-Farm Payrolls Surprise

Non-Farm Payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department reported.

Economists polled by Reuters had forecast payrolls advancing by 978,000 jobs. The unexpected slowdown in job growth was likely due to shortages of workers and raw materials as the economy recovers from the coronavirus pandemic.

‘Knee-jerk Reaction’ in Treasury Yields

The benchmark 10-year yield, which dropped to 1.46%, the lowest since March 4, was last up 1.60 basis points on the day at 1.5771%, holding below a 14-month high of 1.776% reached on March 30.

The 30-year yield tumbled to its lowest level since March 1 at 2.158%. It was last 4.4 basis points higher at 2.28%.

The yield drop was a “knee-jerk reaction” that faded as the session wore on and the market digested the data, according to analysts.

The most closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was about 2 basis points steeper at 143.20 basis points.

U.S. interest rate futures indicated that traders pushed out expectations of a Fed rate hike by roughly three months after the payrolls report’s release.

Weekly Outlook

Gold traders will continue to monitor the movement in U.S. Treasury yields this week for direction. The headline employment data may have missed, but the news didn’t derail the economic recovery. Jobs are likely to continue to be added monthly with the pace of hirings picking up as the number of workers seeking jobs improves and more raw materials become available.

Despite a huge miss, which it was, it’s still employment going in the right direction,” said Andrew Richman, senior fixed income strategist at Sterling Capital Management.

In the U.S. this week, the key reports are Tuesday’s JOLTS Job Openings, a favorite of the Fed. The Consumer Price Index will be released on Wednesday and on Thursday, data on Retail Sales.

A jump in the consumer price index could make traders forget about Friday’s disappointing U.S. Non-Farm Payrolls report.

Traders will also get to hear the reactions to Friday’s jobs report from several Federal Open Market Committee (FOMC) members.

Any strong economic news from the United States is likely to underpin U.S. Treasury yields. This could make the U.S. Dollar a more attractive investment and weaken gold prices.

For a look at all of today’s economic events, check out our economic calendar.

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