Rising Rates Weigh on Gold, Recession Fears Limit Losses

Gold prices are down sharply on Monday, pressured by an overnight surge in U.S. Treasury yields and a stronger U.S. Dollar. Reports of potential peace talks between Russia and Ukraine this week also dampened the so-called safe-haven appeal of the precious metal.

At 12:00 GMT, June Comex gold futures are trading $1935.10, down $24.70 or -1.26%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $182.41, down $0.72 or -0.39%.

Higher yields tend to weigh on gold prices because they increase the opportunity cost of holding zero-yield bullion. The strength in the U.S. Dollar is making gold more expensive for other currency holders.

Yields Surge then Retreat Ahead of this Week’s Labor Market Reports

The benchmark 10-year U.S. Treasury yield jumped to 2.557% overnight before pulling back to 2.460%.  The yield is now lower for the session.

The 10-year yield has jumped from 2.15% since the beginning of last week, after Federal Reserve Chairman Jerome Powell said the U.S. central bank could be more aggressive with rate hikes, in an effort to keep inflation under control.

Labor market data is one economic indicator used by the Fed to help guide its direction on monetary policy, so investors will be keeping an eye on the employment reports due out this week.

February’s Job Openings and Labor Turnover survey is slated for release on Tuesday. This is followed by the release of the March ADP Employment Change report on Wednesday, a weekly update on jobless claims filings on Thursday and March’s Non-Farm Payrolls report on Friday.

Inflation Remains Key Concern

Rising inflation, exacerbated by the Russia-Ukraine war, has resulted in increased market nervousness over the potential for an economic slowdown.

The February personal consumption expenditure index, which is one measure of inflation, is due out on Thursday. The PCE index is the inflation gauge closely watched by the U.S. Federal Reserve.

Rising Rates Make US Dollar Attractive Asset, Capping Demand for Gold

Earlier today, the dollar index strengthened to its highest level in more than a week, driving down demand from foreign buyers. The dollar has benefited from its status as a safe haven and the conflict in Ukraine has driven expectations the U.S. Federal Reserve will hike rates.

Short-Term Outlook

It’s hard to call gold a “safe-haven” asset at this time because riskier assets like stocks have risen since Russia invaded Ukraine on February 24. Furthermore, the most popular safe-haven asset, U.S. Treasury notes and bonds, have fallen sharply. Additionally, another traditional safe-have asset, the Japanese Yen, has been crushed.

But rather than focus on the “safe-haven” reason for buying gold, investors should be looking at the possibility of a recession as being the key reason gold is being underpinned.