Gold is the thing you are supposed to own when prices climb. So with inflation at a three-year high, it should be flying.
Instead it just dropped to a six-month low.
How Gold Usually Reacts To Inflation
Gold is the classic safe haven. When markets get scary, investors pile in and treat it as a store of value.
It is also meant to guard against inflation, since cash buys less over time. So a three-year high in prices should have been good news for gold.
The Iran war, now in its fourth month, has pushed energy and food prices up. U.S. inflation in May rose at its fastest pace in three years.
Earlier in the war, gold was one of the hottest trades around. That popularity is now working against it as buyers cash out.
Why Higher Rates Hurt Gold
Gold pays you nothing to hold it. So it loses its shine the moment safer bets start paying more.
It is extra touchy about real interest rates, which is the return left after inflation. When that return climbs, holding a metal that pays nothing stings more.
Traders now think the Fed could raise rates by December instead of cutting them. That bet sits at 67% on CME Group's tracking tool.
A strong May jobs report only added to that case. A Treasury bond is a loan to the government that pays interest, and when its rate climbs, money leaves gold and chases it.
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The Chart Looks Weak Too
Gold also broke a line traders watch closely. It fell below its 200-day average price for the first time since 2023.
Citigroup called that a clear warning sign. The bank turned cautious on gold when the Iran war heated up in the spring.
Gold touched $4,046.20, its lowest since November, before settling near $4,111.10. Down 6.3% on the week, it is having its worst stretch since March.
Wall Street Is Split On What's Next
Citi sees the drop as short-term. It expects gold to climb again once the Strait of Hormuz situation calms down and energy costs ease.
JPMorgan is less hopeful. It says investors have walked away from the "debasement trade", the bet that the dollar keeps losing value and usually sends people into gold.
The bank points to money leaving gold funds and to weaker bets in the futures market. Worries about government debt have not been enough to pull buyers back.
What To Watch
The next test is the Fed meeting next week, the first led by new chair Kevin Warsh. Most economists once expected several rate cuts this year, and now a Reuters poll shows them betting on none.
Gold's whole slump rests on one fear, that the Fed gets tougher instead of easier. For now, the inflation hedge is the trade nobody wants.
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