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Gold can't catch a break

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(Kitco News) - The gold market has found itself in a sticky situation as the prices have dropped nearly 4% this week, its worst selloff in roughly a year. After four consecutive weekly losses, the precious metal has fallen to its lowest level in three months. If you look at sentiment in the marketplace, gold might struggle to hold $1,800 an ounce.

This week's selloff is even worse because gold found no help from the latest inflation data. This week, U.S. CPI showed annual inflation rose 8.3% in April. Consumer prices dropped from March's 8.5% reading; however, it was still hotter than expected.

With gasoline prices hitting record highs nationwide and food prices moving up, there is a strong indication that inflation will be more persistent than some expect, including the Federal Reserve.

Inflation is also having a significant impact on consumer sentiment. According to the latest University of Michigan survey, consumer sentiment has dropped to its lowest point in 11 years. The survey also noted that consumers think now is the worst time to buy durable goods since the late-1970.

Despite all this disappointing economic news, the gold market can't catch a break. It appears that the Federal Reserve's aggressive monetary policy stance is working. Inflation expectations have remained well anchored.

The gold market faces two significant headwinds: the rising U.S. dollar and bond yields.

Real bond yields have turned positive and are at their highest level since the pandemic started. This is a terrible environment for a non-yielding asset like gold. The U.S. bond market competes with gold as a safe-haven asset in growing uncertainty.

At the same time, The Federal Reserve's monetary policy stance also supports bullish momentum in the U.S. dollar. The U.S. dollar index is trading at its highest level in 20-years above 104 points.

This is not great news for gold prices.

Although gold is struggling in a difficult environment, some analysts remain optimistic that the precious metal can hold its ground, especially as equity markets face further uncertainty and growing volatility. Although gold has lost all its gains this year, it has still outperformed the S&P 500. Although the index has regained the 4,000 level, it is still down nearly 16% this year.

Many market analysts have suggested that equities still have farther to go on the downside as interest rates move higher.

"Gold's role in times of crisis and uncertainty is to maintain and preserve value, which it is doing," said Steve Land, vice president and portfolio manager of Franklin Templeton's Franklin Gold and Precious Metals Fund, in an interview with Kitco News. "There's no question that there are a lot more moving pieces in the global economy than there have been in a long time. Gold's low correlation to markets means it's some place investors can hideout to a degree."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.