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U.S. economic data hammers gold price as markets gear up for a rate hike in June

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(Kitco News) The gold market got battered by upbeat economic data and stubbornly high inflation. As gold posted its third weekly loss, markets recalibrated for another 25-basis-point rate hike in June after pause expectations got shattered.

Gold is looking to close down $35 on the week, with June Comex gold futures last trading at $1,945.80 an ounce. Despite the selloff, year-to-date gold is still up more than 6%.

The macro data was the main driver weighing on gold at the end of the week, TD Securities global head of commodity strategy Bart Melek told Kitco News.

"The durable goods number, personal spending, and the PCE inflation measures were all broadly above expectations," Melek said. "Not only is inflation not dropping, the Federal Reserve's preferred inflation measure — the core PCE price index — went to 4.7% in April."

Inflation near 5% is too high for the Fed to justify a pause in June, and the market is pricing that in. The latest market expectations see a 60% chance of a hike at the June 13-14 meeting, Gainesville Coins precious metals expert Everett Millman told Kitco News.

"That is a big reversal from earlier estimates," he said. "The speed at which this kind of re-pricing happens gets the attention of the gold market. Rapid changes in expectations lend themselves to more volatility."

On top of that, the U.S. dollar has performed well, and gold responded with a move down. "We think gold prices may be subdued for much of the quarter and probably into the early part of Q3," Melek said. "The market has mispriced Fed's intentions."

With the Fed zeroed in on inflation, not much will likely sway the central bank before the June meeting. Millman added that the debt ceiling debate drama is the one thing to closely monitor as any downgrades to the U.S. credit rating would trigger safe-haven flows into gold.

Meanwhile, negotiations to raise the U.S. government's $31.4 trillion debt ceiling before June 1 hit some obstacles on Friday. Earlier, Democratic and Republic negotiators appeared nearing a deal to lift the debt cap for two years while limiting some spending.

"We have made progress," lead Republican negotiator Garret Graves told reporters. "I said two days ago, we had we had some progress that was made on some key issues, but I want to be clear, we continue to have major issues that we have not bridged the gap on chief among them work requirements."

Gold price levels to watch

The next support level for gold is $1,940 an ounce, Millman said. Below that, investors should watch the $1,915 and $1,900.

Analysts do not rule out a move lower to $1,900. "Firm support is at around $1,900-$1,896," Melek said.

It is too soon to call a bottom in gold even though the precious metal is down more than $125 since testing record highs a few weeks ago, RJO Futures senior market strategist Frank Cholly told Kitco News.

"The market is telling us we will see another rate hike in June and maybe one in July. Gold doesn't like that," Cholly said. "Somewhere between the $1,950-$1,925 range on August futures, traders will find value, and the market will form a base before turning higher," he said.

Data next week

Tuesday: U.S. CB consumer confidence

Wednesday: U.S. JOLTs job openings, Beige Book

Thursday: U.S. jobless claims, U.S. ADP nonfarm employment, U.S. ISM manufacturing PMI

Friday: U.S. nonfarm payrolls

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