Gold prices experienced their steepest decline in over two months as robust US jobs data heightened expectations of an interest rate hike by the Federal Reserve.
On Friday, gold fell as much as 3.4% as US bond yields and the dollar surged following the release of employment figures that exceeded forecasts for May. The strong labor market data has kept the possibility of a rate hike open, especially amid rising energy prices due to Middle East tensions. Higher interest rates typically pose a challenge for non-yielding assets like gold.
Elias Haddad, global head of markets strategy at Brown Brothers Harriman & Co., noted that gold is facing a "double headwind from rising real yields and a firmer dollar." He pointed out that a break below the 200-day moving average, a key indicator of long-term momentum, suggests the potential for further declines in gold prices.
“Gold faces a double headwind from rising real yields and a firmer dollar.”
Elias Haddad, global head of markets strategy at Brown Brothers Harriman & Co.
Cleveland Fed's Beth Hammack, known for her hawkish stance and a voting member of the Federal Open Market Committee, commented on LinkedIn that it might soon be appropriate to raise rates, given the balanced state of the labor market. Traders have now fully priced in a quarter-point rate hike by the Fed by December, with a 60% chance of it occurring as early as October. Prior to the employment data, expectations were for a rate hike in March.
The selloff in gold was exacerbated by a tech-led rout in stocks, as some investors liquidated positions to cover losses elsewhere, according to Phil Streible, chief market strategist at Blue Line Futures. Meanwhile, ongoing tensions between the US and Iran over the Strait of Hormuz continue to disrupt energy flows and drive oil prices higher, raising concerns about global inflation.
“For today, it’s reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act.”
Beth Hammack, Cleveland Fed
Spot gold fell 3.3% to $4,327.95 an ounce in New York, while silver dropped 7.5% to $68.37 an ounce. Industrial metals also declined, with copper falling 3% on the London Metal Exchange. Investors are worried that tighter financial conditions might slow economic activity and reduce demand for raw materials like copper and aluminum.
Background
The recent developments in the gold market underscore the broader economic implications of US monetary policy and geopolitical tensions. Historically, gold has been seen as a safe haven during times of economic uncertainty, but rising interest rates can diminish its appeal.
Looking ahead, market participants will closely monitor the Federal Reserve's upcoming meeting on June 16-17, led by new Chairman Kevin Warsh, for further indications on interest rate policy. The ongoing geopolitical tensions and their impact on global markets will also be key factors to watch.
