Spot gold erased this year's gains as strong U.S. employment data boosted market bets on a possible Fed rate hike, which is unfavorable for this precious metal.
After the latest U.S. data showed May job growth exceeding all expectations, bond yields and the dollar rose, with spot gold prices dropping as much as 3.6% on Friday to $4,315.35 per ounce, giving back gains so far this year. As tensions in the Middle East push energy prices higher, the strong labor market has reinforced expectations for Fed officials to raise rates. Interest rate hikes are generally unfavorable for the non-interest-free asset gold.
"Rising real yields and a stronger dollar pose a double headwind for gold," said Elias Haddad, Global Head of Market Strategy at Brown Brothers Harriman & Co. Haddad stated that if it falls below the widely watched long-term momentum indicator — the 200-day moving average — gold prices will face further downside risks.
After the employment report was released, Cleveland Fed President Beth Hamack posted on LinkedIn that given the labor market appears to be in balance, it may soon be appropriate to raise interest rates. She is regarded as the most hawkish official, with voting rights at the Federal Open Market Committee (FOMC).
Traders have now fully priced in the Fed's 25 basis point rate hike by December and believe the probability of a rate hike as early as October is about 60%. Before the employment data was released, their expectation was that policymakers' next move would be a rate hike in March. Federal Reserve officials will hold a meeting from June 16 to 17, chaired by the new Chair Kevin Warsh.
Phil Streible, Chief Market Strategist at Blue Line Futures, said that the sell-off led by tech stocks has also intensified gold's decline, as some investors cut positions to offset losses in other areas.
Meanwhile, as weekends approach, the U.S. and Iran remain deadlocked over a potential ceasefire agreement, with the conflict approaching 100 days in a row, with Tehran claiming sovereignty over the Strait of Hormuz with Oman.
This makes it more likely that central banks will keep rates unchanged or raise them, thereby creating resistance for precious metals. After the conflict erupted at the end of February, gold fell sharply, fluctuating within a narrow range over the past few weeks.
At 2:50 p.m. New York time, spot gold prices fell 3.5% to $4,319.68 per ounce. Silver fell 7.8%, closing at $68.16 per ounce. Platinum and palladium also declined. The Bloomberg Dollar Index rose 0.6%.
Industrial metals also declined, with London Metal Exchange (LME) copper prices hitting their largest drop in over two months. Investors worry that tightening financial conditions will eventually drag down economic activity and reduce consumption of raw materials such as copper and aluminum.
LME copper prices fell 3%, settling at $13,519.50 per ton. Other base metals in the London market fell across the board, with aluminum prices down 2% and zinc prices down 1.6%.