Gold Extends Losses On US Rate Hike Fears As Strong Jobs Data And Middle East Tensions Weigh

Gold had a rough start to the week. Prices dropped 0.4% to $4,313.11 per ounce in early Monday trade, adding to a near 3% fall seen on Friday that took the metal to its lowest level since 24 March. US gold futures for August delivery were also lower, down 0.7% at $4,336.30.

Two things drove the sale. A stronger than expected US jobs report for May showed the labour market picking up steam for a third straight month, giving the Federal Reserve more room to keep rates steady even as inflation stays elevated due to the Iran war. At the same time, fresh military action in the Middle East pushed oil prices higher, deepening inflation concerns and adding to uncertainty around the rate outlook.

Rate Hike Bets Move Higher

Markets are now pricing in a 72% chance of a Federal Reserve rate hike before the end of the year, according to CME Group's FedWatch tool. A Cleveland Fed official noted over the weekend that the labour market appears close to full employment, and said that persistently high inflation may require the central bank to act sooner rather than later.

Rising Treasury yields added to the pressure on gold. The benchmark 10-year US Treasury yield climbed after hitting a two-week high in the previous session. Higher yields increase the opportunity cost of holding gold, which pays no interest, making the metal less attractive compared to fixed-income assets when rates are going up.

Middle East Adds To The Mix

Israel carried out strikes on military targets in western and central Iran on Monday, even after reports that US President Donald Trump had urged Israeli Prime Minister Benjamin Netanyahu to hold back from further escalation. The development sent oil prices up more than $3 a barrel, deepening inflation concerns.

While gold is typically seen as a hedge against inflation, the prospect of higher interest rates tends to outweigh that benefit. In the current environment, the rate hike narrative is clearly winning.

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Other precious metals also lost ground. Spot silver fell 0.4% to $67.56 per ounce and platinum dropped 0.5% to $1,767.15. Palladium held steady at $1,225.66.

Sources:

Reuters

The Economic Times