Gold Slammed as Strong Jobs Report Revives Rate Hike Fears

Well, after precious metals appeared ready to finish the week on a strong note, a surprisingly strong U.S. employment report changed the picture on Friday morning.

And once again, it all comes down to expectations about what the Federal Reserve will do with interest rates.

Gold and silver were getting slammed earlier this morning, with gold falling more than 2% following the release of the August jobs report – although it has since recovered somewhat.

The Labor Department reported this morning that the U.S. economy added 162,000 jobs in August. That was nearly triple the roughly 56,000 jobs economists had expected. The unemployment rate also held steady at 4.1%.

On top of that, the government revised the previous two months higher by a combined 55,000 jobs.

Traders immediately began betting that the Fed is more likely to raise interest rates again.

Before the report, markets were putting the odds of a September rate hike at roughly 50-50. After the strong jobs numbers came out, the probability of a quarter-point hike jumped to around 60%.

Bond yields and the U.S. dollar moved higher.

And that was all traders in the highly leveraged futures markets needed to hear.

Initially, gold plunged more than 2% this morning, falling to around $4,375 an ounce in early trading. That's a remarkable reversal from Thursday, when the yellow metal surged roughly 2% and appeared to be regaining its footing.

Thursday's rally came after Fed Governor Christopher Waller suggested he could support leaving rates unchanged this month if inflation continues to cool.

Silver followed basically the same pattern. It enjoyed a strong recovery Thursday before getting caught in Friday morning's precious metals selloff.

The dramatic reversal shows just how sensitive gold and silver remain to changing expectations about interest rates.

But investors shouldn't mistake a bad day in the metals markets for a change in the long-term reasons for owning gold and silver.

The Fed is still dealing with stubborn inflation, enormous federal deficits, high borrowing costs, and now an economy that appears stronger than many economists expected.

In fact, today's employment report may make the Fed's job even harder.

Fed officials have been looking for signs that higher interest rates are slowing the economy enough to bring inflation under control. Instead, they just received evidence that employers are still hiring at a healthy pace.

That makes another rate hike more likely, which is clearly weighing on gold and silver today.

But higher interest rates create another problem. They also increase the cost of servicing the enormous federal debt. And the longer rates remain high, the more financial pressure that creates.

Meanwhile, central banks around the world are sending a very different message about gold.

They're not just watching what its price does from one day to the next. They increasingly view physical gold as a form of financial insurance.

And they're paying closer attention to where that gold is actually stored.

The latest example comes from the Netherlands.

The Dutch central bank has moved approximately 86 metric tons of gold out of North America and into London, citing growing geopolitical risks and the need to be better prepared for a potential crisis.

That's a substantial move.

Before the change, more than half of the Netherlands' gold reserves were stored in North America. About 31% was in New York and nearly 20% was in Ottawa.

Now, each location holds about 18.5% of Dutch reserves, while London's share has jumped from 18% to 32%.

And the reasoning isn't difficult to understand.

The Dutch central bank says spreading its gold among different locations reduces risk and makes the metal easier to access and use during a crisis.

Think about it this way.

You may legally own gold sitting in a vault thousands of miles away. But if there's a major financial or geopolitical crisis, suddenly the location of that gold matters.

Can you get to it? Can you move it? What government has jurisdiction over it? And what happens if transportation or financial markets are disrupted?

The Netherlands isn't the only country asking those questions.

France recently eliminated its remaining central-bank gold holdings in New York. Germany previously moved hundreds of tons of gold back home from Paris and New York, although it still keeps a significant amount at the New York Fed.

And a World Gold Council survey this year found more central banks changing where they keep their gold. Some are bringing more of it home, while others are spreading their overseas holdings among different locations.

In other words, central banks aren't just thinking about how much gold they own. They're thinking about where they own it.

And there's an interesting lesson here for the United States.

A tremendous amount of America's gold and silver trading infrastructure and physical inventory is concentrated in and around New York.

That may be convenient during normal times. But putting too much of something important in one place also creates risk.

A natural disaster, terrorist attack, major power outage, transportation shutdown, or other crisis could disrupt access to a large portion of the country's precious metals market at once.

That's why geographic diversification matters.

Central bankers understand something precious metals investors have understood for generations: Gold is supposed to protect you when the normal financial system isn't working normally.

And if that's why you own it, then where your gold is located – and whether you can actually get to it when you need it – matters.

So, Friday's strong jobs report may help determine what gold and silver do today, next week, or even next month.

But the much bigger story is what central banks are doing with physical gold for the long haul. They're continuing to treat it as strategic financial insurance – and increasingly, they're making sure they don't keep too much of that insurance in any one place.

Looking more closely now at the weekly market action before we get to this week’s interview, gold is down a slight 0.4% to check in at $4,450 an ounce as of this Friday late morning recording.

As for silver, the white metal showed a decent gain through Thursday but with today’s pullback is currently trading at $66.85, down about 20 cents or 0.3% on the week.

As for the PGMs, platinum is unchanged at $1,836, while palladium is showing a weekly decline of 2.7% to trade at $1,418 an ounce.

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