Spot gold has erased its gains for the year as robust US employment data bolstered market bets that the Federal Reserve may raise interest rates this year, which is unfavorable for the precious metal.
Following the latest US data showing May job growth exceeded all expectations, bond yields and the dollar rose, pushing spot gold prices down as much as 3.6% on Friday to $4,315.35 per ounce, wiping out its year-to-date advance. The strong labor market performance, amid heightened Middle East tensions driving up energy prices, reinforced market expectations for Fed officials to hike rates. Higher interest rates are typically detrimental to non-yielding assets like gold.
"Rising real yields and a stronger dollar are a double whammy for gold," said Elias Haddad, Global Head of Market Strategy at Brown Brothers Harriman & Co. Haddad noted that if the price breaks below the closely watched long-term momentum indicator—the 200-day moving average—it risks further declines.
After the jobs report, Cleveland Fed President Beth Hammack posted on LinkedIn that, given the labor market appears to be in balance, it may soon be appropriate to raise rates. She is viewed as one of the most hawkish officials and holds a vote on the Federal Open Market Committee (FOMC).
Traders have now fully priced in a 25-basis-point Fed rate hike by December, with the probability of a move as early as October seen at around 60%. Prior to the jobs data, their expectation was that policymakers' next move would be a rate cut in March. Fed officials are scheduled to meet on June 16-17 under the leadership of new Chair Kevin Warsh.
Phil Streible, Chief Market Strategist at Blue Line Futures, stated that the stock market sell-off, led by technology shares, also exacerbated gold's decline, as some investors reduced positions to cover losses in other areas.
Meanwhile, heading into the weekend, the US and Iran remained deadlocked over a potential ceasefire agreement, with the conflict nearing 100 days. Tehran has asserted its sovereignty, alongside Oman, over the Strait of Hormuz.
This makes it more likely that central banks will keep rates steady or hike them, posing a headwind for precious metals. Gold fell sharply after the conflict erupted in late February and has traded in a narrow range in recent weeks.
As of 2:50 PM New York time, spot gold was down 3.5% at $4,319.68 per ounce. Silver fell 7.8% to $68.16 per ounce. Platinum and palladium also declined. The Bloomberg Dollar Spot Index rose 0.6%.
Industrial metals also fell, with copper on the London Metal Exchange (LME) posting its biggest drop in over two months. Investors are concerned that tighter financial conditions will ultimately weigh on economic activity and reduce consumption of raw materials like copper and aluminum.
LME copper fell 3% to settle at $13,519.50 per tonne. Other base metals on the London market fell across the board, with aluminum down 2% and zinc down 1.6%.
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