Gold drops 1% as strong US payrolls boost dollar, yields

By Anushree Mukherjee

Nov 6 (Reuters) - Gold prices fell 1% 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 1% to $4,047.10 per ounce by 8:46 a.m. ET (1346 GMT). The metal hit a low of $4,033.29 earlier in the session.

Spot gold was up 4.5% for the week, on track for its best week since late August.

US gold futures for December delivery dropped 1.4% to $4,057.20.

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.USD/US/

"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 a 74.8% 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. O/R

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. GOL/AS

Among other metals, spot silver rose 0.3% to $51.92, platinum gained 0.5% to $1,524.03, while palladium fell 1.6% to $1,015. All three were poised for weekly gains.