Gold sinks to more than one-year low as Fed rate hike bets boost dollar, Treasury yields

On Thursday, gold prices slipped as the U.S. dollar surged due to heightened expectations of Federal Reserve interest rate hikes. By 16:38 ET (21:38 GMT), spot gold fell 2.9% to $3,874.04/oz, and gold futures decreased 3.1% to $3,878.57/oz. Over the past five sessions, spot gold has declined 5.2%, while the U.S. dollar index has risen 1.6%.

Despite the decline, gold and silver prices have not yet broken below cycle lows reached at the end of last month or earlier this month. However, this week's rally attempt was quickly halted as the U.S. dollar strengthened on expectations of additional rate hikes this year and next.

David Morrison, senior market analyst at Trade Nation, explained that the gold market's disappointment stemmed from the sharp three-week rally that followed a summer of price consolidation. The question now is whether gold and silver have found their bottom or if there is a risk of a further decline, with lower cycle lows possible.

The moves in gold and the dollar were triggered by the release of the U.S. jobs report last Friday. Total nonfarm payroll employment increased by 165k in October, surpassing the consensus estimate of 65k. Furthermore, revisions showed a combined increase of 84k for August and September. After a brief pause on Monday, gold resumed its decline on Tuesday following elevated-than-anticipated U.S. consumer price index (CPI) readings.

Headline CPI rose 0.4% M/M in October, down from a 0.6% increase in September, but exceeded expectations of a 0.3% increase. Core CPI, which excludes volatile food and energy prices, remained unchanged at 0.3% M/M, slightly above the 0.2% consensus.

With the data pointing to a robust labor market and persistent high inflation, a central bank typically responds by tightening monetary policy. Fed Governor Christopher Waller, on Tuesday, indicated his support for rate hikes, even if inflation data had been cooler. He suggested that a 50 basis point increase in the key policy rate could be warranted if the data is robust.

Speculation is mounting for a Fed rate hike in December, with the CME FedWatch tool showing an 85% chance of a 25 basis point hike and a 15% chance of a 50 basis point hike.

Besides interest rates, oil prices also contributed to gold's downward pressure. Brent crude futures, the global benchmark, rose 3.3% to $95.80 a barrel. President Donald Trump tweeted on Thursday that the U.S. does not need a deal with Iran, stating that those days have long since passed. Trump had previously stated he did not believe further strikes on Iran were necessary.

The potential negotiations could signal another push by Washington to end the war, which Vance has largely blamed for the Republican Party's performance in the U.S. midterm elections last week. Meanwhile, Brent crude futures fell to their worst weekly performance since late April 2020 due to hopes that, with the Democrats now controlling both chambers of Congress, there would be increased pressure on the Republican White House to find a diplomatic solution with Iran.