Gold drops as strong US payrolls boost dollar, yields

Gold prices fell on Friday after stronger-than-expected US payrolls data reinforced expectations that the Federal Reserve could keep interest rates higher for longer, boosting the dollar and Treasury yields.

Spot gold fell 0.3% to $4,074.36 per ounce by 01:54 p.m. ET (1854 GMT). The metal fell by more than 1% to hit a low of $4,033.29 earlier in the session.

Spot gold was up 5.2% for the week, on track for its best week since August.

US gold futures for December delivery settled 0.9% lower at $4,074.90.

The US dollar rose 0.7% to its highest level since October 29, making dollar-denominated gold more expensive for holders of other currencies, while benchmark 10-year Treasury yields also climbed.

"Gold gapped lower on a stellar employment report (that was) strong across the board, but is trying to claw back higher. This is a litmus test for this week's rally," independent metals trader Tai Wong said.

US nonfarm payrolls increased more than expected in October and the unemployment rate fell to 4.1%, suggesting the labor market remained resilient and giving the Federal Reserve more scope to focus on inflation stemming from the Middle East conflict.

Traders currently see an 81% chance that the Fed will raise rates in December, compared with 72.8% before the payrolls report, according to CME's FedWatch tool.

Higher interest rates raise the opportunity cost of holding non-yielding bullion, making gold less attractive to investors.

Brent crude was on track for a sharp weekly drop on expectations of a de-escalation in the US-Iran war after midterm election results, although persistent Middle East supply concerns continued to support prices.

Two Federal Reserve officials on Thursday backed small, steady rate hikes to rein in above-target inflation.

On the physical front, lower gold prices encouraged Indian retail buying ahead of the key Diwali festival. Gold had dropped to a one-year low of $3,869.85 an ounce on October 30.

Among other metals, spot silver rose 0.8% to $52.18, platinum gained 1.6% to $1,541.42, while palladium fell 0.6% to $1,024.59. All three were poised for weekly gains.