Gold rallied to a seven-week high on Friday after a surprise contraction in US nonfarm payrolls for July sharply reduced market expectations for a Federal Reserve rate hike in September, putting bullion on track for its strongest weekly performance in seven months.

Spot gold climbed above $4,360 an ounce, gaining more than 3 percent on the day and reaching its highest level since June 17. Over the full week, bullion rose more than 7 percent — its largest weekly advance since January 19. Gold is particularly sensitive to shifts in US monetary policy expectations because it competes with yield-bearing assets for investor capital.

Payrolls Miss Reshapes Rate Expectations

The US Labor Department's Bureau of Labor Statistics reported that nonfarm payrolls fell by 23,000 in July, a sharp reversal from a downwardly revised 20,000 increase in June and well below the 80,000 gain that economists polled by Reuters had anticipated. The nonfarm payrolls report is among the most closely watched data points the Federal Reserve uses to assess labor market conditions, which the central bank has cited as a key justification for its tightening cycle.

The scale of the miss — a 23,000 decline against a forecast 80,000 gain — is the clearest signal yet that the Fed has more room to hold or cut rates than markets had previously priced. One analyst noted that the weaker-than-forecast data makes the Federal Reserve less likely to raise rates at its next meeting.

Following the report, rate futures shifted decisively. The probability of a September Fed hike dropped to roughly 45 percent, down from 57 percent before the release, while odds that the Fed holds rates steady next month rose to 56 percent from 43 percent.

Dollar Under Pressure as Real Yields Soften

Declining energy prices combined with reduced rate hike odds are together weighing on the US dollar and keeping real yields softer — a combination broadly supportive for bullion. Because gold generates no yield of its own, lower interest rates make it comparatively more attractive against yield-bearing assets such as bonds. Gold also benefits from sustained central bank purchases — particularly from emerging market economies diversifying reserves away from the dollar — which have provided structural demand support alongside the rate-driven investment flows seen this week.

For the Australian dollar, a softer US dollar and firmer gold prices are typically supportive, though the read-through is partial given that gold's move is being driven more by US rate repricing than by broader risk appetite.

Bank Sees Path to $5,000

One major global bank said in a note on Friday that it expects gold prices to climb as high as $5,000 an ounce in the first half of 2027, citing the same dynamic of a softer dollar and lower real yields drawing investors toward the metal. Gold's move above $4,360 and its best weekly gain since January point to fresh momentum rather than a one-off spike.

Risks Ahead

The principal risk to the bullish case is a hawkish reassertion from the Fed if upcoming inflation data surprises to the upside, which would temper the dollar weakness that this rally depends on. With the September Fed decision now firmly in focus, forthcoming inflation releases — including the Consumer Price Index and the Fed's preferred Personal Consumption Expenditures gauge — as well as the next employment report are likely to be the next major tests of whether the rally has further room to run.