(Kitco News) - Gold is flexing its strength this week, testing resistance near $2,700 an ounce and hitting a four-week high even as the U.S. dollar and bond yields climb to multi-year peaks.
Robust labor market data on Friday pushed the 10-year bond yield to 4.76%, its highest level in 16 months. At the same time, the U.S. dollar index is above 109 points, trading at its highest level in nearly three years.
Despite these two significant headwinds, gold is looking to end the week with nearly 2% gains, with pot gold last trading at $2,686.20 an ounce.
Although the U.S. economy created 256,000 jobs last month, significantly beating economists' expectations, some analysts note that there are still major risks to the economy later in the year.
Some analysts have suggested that the employment data could force the Federal Reserve to end its easing cycle even earlier than expected.
Meanwhile, in further support of gold, preliminary sentiment data from the University of Michigan on Friday showed that consumer optimism is falling and inflation fears are picking up, potentially indicating a stagflationary environment.
Analysts note that even with the solid employment data, equity markets have sold off sharply, with the S&P falling more than 1% on Friday.
“I think [gold’s price action] reflects what is happening in the stock market, which is that traders are worried about the rise in U.S. yields and the implications for the economy in terms of borrowing costs and the consequences for growth,” said Kathy Lien, Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. “Not having more rate cuts from the Fed earlier in the year is going to lead to more pain later on.”
Lukman Otunuga, Manager of Market Analysis at FXTM, noted that gold has outperformed all week, highlighting broader risk-off sentiment in the marketplace.
“Investors seem to be rushing toward the precious metal thanks to fears over Trump’s tariffs and inflation. While higher rates typically are bad news for zero-yielding gold, uncertainty over tariffs continues to accelerate the flight to safety,” he said. “Gold is up over 2% this week, pushing its year-to-date gains to nearly 3%. Looking at the charts, prices are turning bullish with the next key resistance at $2,715.”
Otunuga added that gold could be sensitive to inflation data next week, as higher consumer prices could put even more pressure on the Federal Reserve to hold interest rates relatively steady through 2025.
At first blush, higher interest rates are a negative for gold; however, some analysts note that higher interest rates, with the Fed on hold, will push real interest rates lower, creating a positive environment for the yellow metal.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that gold is just one asset in the broader commodity sector that is benefiting as an inflation hedge this week.
Looking beyond America’s borders, some analysts point out that it’s not surprising gold is rallying along with the U.S. dollar, as the precious metal is rallying against every major currency this week.
Gold has seen significant gains against the British pound as the nation deals with a new bond crisis. U.K. bond yields have surged higher because of concerns that the government won’t be able to keep the deficit under control as spending costs increase.
Hansen noted that while the U.K. is experiencing volatility, the U.K. isn’t the only country with a debt problem. He warned investors to monitor developments in the U.K., asking, “If the U.K. is the first, who will be next?”
Some analysts note that with gold trading at record highs against the British pound and the euro, it might be only a matter of time before the U.S. dollar follows them lower.
Economic data to watch next week
Tuesday: US PPI
Wednesday: US CPI, Empire State Manufacturing Survey
Thursday: US retail sales, Philly Fed Survey, Weekly jobless claims
Friday: US housing starts and building permits
