Gold price nearly flat on the year as rate hike chances surge

Gold fell by the most in three weeks as the release of new US jobs data reinforced investor expectations that the Federal Reserve will likely raise interest rates this year amid inflation concerns.

Spot gold declined as much as 3% to $4,330 an ounce, its lowest since March. US gold futures also fell more than 3.2% to $4,357.60 an ounce.

After surging to a record near $5,600 in January, bullion has now taken a round-trip back and has almost erased all of its year-to-date gains.

In recent weeks, the yellow metal has been facing pressure from inflation concerns stemming from the Middle East conflict. Elevated energy prices caused by the Strait of Hormuz closure have raised market expectations that central banks will keep interest rates higher for longer, a scenario that hurts bullion despite the metal’s traditional role as an inflation hedge.

Since the war started, gold has dropped by nearly 18%.

Jobs report surprise

The latest decline follows the May nonfarm payrolls report, which showed that the US jobs market was much stronger than expected, which analysts say could open the doors to a Fed rate hike.

“We’ve got payrolls that came in fairly significantly over what was expected,” Bart Melek, global head of commodity strategy at TD Securities, told Reuters following the data release on Friday.

Both the US Treasury yields and the dollar jumped after the release of the jobs data, increasing the opportunity cost of holding non-yielding assets such as gold.

“In light of the fact that we continue to have the war in Iran and very large energy prices and inflationary pressures, it makes it quite unlikely that the Fed is in any mood whatsoever to lower rates. The implication for gold here is that the cost of carry is getting quite high,” he added.

Markets are now pricing about a 68% chance of a Fed rate hike in December, according to CME Group’s FedWatch tool, compared to about 50% before the jobs data.

Cleveland Fed’s Beth Hammack, who is considered the most hawkish and a voting member on the Federal Open Market Committee, said in a LinkedIn post after the jobs report that it may soon be appropriate to raise rates as the labor market appears to be in balance.

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