Gold experienced a significant decline on Friday, completely erasing all its gains for the year. Strong US employment data has reignited market bets on Federal Reserve interest rate hikes, compounded by a strengthening US dollar and rising Treasury yields, putting clear pressure on the precious metal.
US job growth in May exceeded all expectations, causing spot gold to drop as much as 3.6% to $4,315.35 per ounce, surrendering all its year-to-date gains.
Following the jobs report, Beth Hammack, President of the Cleveland Fed and considered the most hawkish voter on the Federal Open Market Committee, stated that if recent trends persist, "it may soon be appropriate to take action" on raising rates, further cementing market expectations for tighter monetary policy. Traders have now fully priced in a 25-basis-point Fed rate hike by December, with the probability of a hike by October standing at approximately 60%.
Simultaneously, the ongoing stalemate in the Middle East, with Iran and the US remaining divided over a ceasefire, has disrupted energy flows through the Strait of Hormuz, pushing oil prices higher. This further intensifies global inflation concerns, increasing the likelihood that central banks will maintain high interest rates or even implement further hikes, adding extra pressure on non-yielding assets like gold.
Phil Streible, Chief Market Strategist at Blue Line Futures, noted that some investors are reducing their gold holdings to cover losses in other assets, exacerbating the selling pressure on the precious metal. Silver plunged 7.8% on Friday to $68.16 per ounce, with platinum and palladium also declining. The Bloomberg Dollar Spot Index rose 0.6%.
Dual Headwinds Pressure Gold, Technical Picture Worsens
This decline in gold is facing a dual pressure from rising real interest rates and a stronger US dollar. Elias Haddad, Global Head of Market Strategy at Brown Brothers Harriman & Co., commented:
"Gold is facing the dual headwinds of rising real yields and a stronger US dollar. A break below the 200-day moving average—a widely followed long-term momentum indicator—would signal the risk of a deeper correction."
At the time of writing, spot gold was down 3.5% at $4,319.68 per ounce. Gold is now down approximately 18% from its pre-conflict level and is on the verge of wiping out all its gains for the year. Since the outbreak of conflict in the Middle East in late February, gold has fallen sharply and has been consolidating within a narrow range in recent weeks.
Hawkish Signals Intensify, Rate Hike Timeline Accelerates
The strong employment data was quickly followed by hawkish commentary from within the Fed. In a LinkedIn post, Beth Hammack stated that the labor market appears to be coming into balance, adding, "For now, given the uncertainty in the economic outlook, maintaining stable rates is reasonable. But if recent trends continue, it may soon be appropriate to take action." This stance is largely consistent with her comments from June 2nd.
Prior to the jobs data release, traders had anticipated the Fed's next move would be a rate hike in March. Market expectations have now shifted significantly forward—a hike by December is fully priced in, and the probability of an October hike has risen to around 60%. The Fed's next policy meeting is scheduled for June 16-17, which will be chaired by the new Chair, Kevin Warsh.
Equities Also Weaken, Metals Sector Broadly Under Pressure
Gold's decline was also weighed down by a tech-led sell-off in the stock market. Phil Streible, Chief Market Strategist at Blue Line Futures, indicated that some investors are cutting gold positions to cover losses elsewhere, adding to the selling pressure. Silver tumbled 7.8% to $68.16 per ounce, with platinum and palladium also falling. The Bloomberg Dollar Spot Index gained 0.6%.
Industrial metals were also under broad pressure. Copper on the London Metal Exchange recorded its biggest single-day drop in over two months, falling 3% to $13,519.50 per tonne. Aluminum declined 2%, zinc closed down 1.6%, and other base metals also moved lower. Investors are concerned that tightening financial conditions will ultimately weigh on economic activity, thereby suppressing demand for industrial raw materials like copper and aluminum.
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