Gold Heads for Worst Month Since 2016 on Dollar Strength, Fed

(Bloomberg) -- Gold headed for the biggest monthly drop in more than four years on the back of gains in the dollar following the Federal Reserve's hawkish shift.

The metal is trading near the lowest since April after the Fed pulled forward its forecasts for interest rate hikes. A stronger dollar has added much of the pressure, with the currency on course for its best month since March 2020, and investors have trimmed holdings in bullion-backed exchange-traded funds.

Traders will focus on economic data and comments from Fed officials for more clues on the timing of stimulus tapering. Richmond Fed President Thomas Barkin said Tuesday he wants to see much more U.S. labor market progress before taking action, while Governor Christopher Waller said economic performance warrants thinking about pulling back on some stimulus.

“Looming asset purchase tapering putting upward pressure on real rates and the U.S. dollar brings downside risk for gold” through the second half of the year, Morgan Stanley wrote in a note. The bank now forecasts gold to drop just below $1,700 an ounce in the next six months, while also flagging the possibility of a sharp downturn through 2022.

Spot gold rose 0.6% to $1,771.46 an ounce at 3:45 p.m. in New York, and is down 7.1% this month, the most since November 2016. Futures for August delivery rose 0.5% to settle at $1,771.60. Spot silver, platinum and palladium all advanced. The Bloomberg Dollar Spot Index is up 2.3% in June.

Investors are also weighing the fallout from the more contagious Delta variant of Covid-19, and broader economic data. Euro-area economic confidence has climbed to the highest level in more than two decades, and U.S. consumers are more upbeat than at any point since the pandemic began. U.S. nonfarm payroll figures due Friday will be a key data point eyed by traders.

“Precious metal markets simply can't find a gear with the stronger dollar and strong economic data weighing on the market,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “Gold once again has its back against the wall. However judging from previous lows, that is what gold needs in order to stabilize, reverse and eventually squeeze the shorts back out of the market.”

There are other signs that investor interest has waned, with hedge funds cutting net-long positions on gold futures to a seven-week low.

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