Gold heads for third weekly drop as dollar rally deepens

Gold is on course for a third consecutive weekly loss, caught between the dollar's strongest run in months and the Federal Reserve's signal that rate cuts are not imminent. Spot bullion slipped 0.5% Friday and has fallen roughly 2% over the week, a stretch of selling not seen since November.

The trigger is the dollar itself. The Bloomberg Dollar Spot Index is up for a fourth straight week, its longest winning streak since September. A stronger dollar makes gold, priced in the U.S. currency, more expensive for overseas buyers. The dollar push accelerated after the Fed's April 30-May 1 meeting minutes showed officials discussing keeping rates high longer than the market had priced. Those minutes, published Wednesday, included mention of "many" participants doubting a near-term cut would be appropriate.

Higher rates are a double blow for gold. They increase the opportunity cost of holding a metal that pays no yield or dividend. They also push real yields up. The 10-year real yield, which strips out inflation, has climbed 12 basis points since the Fed minutes emerged and now sits at its highest level since March. That makes competing assets like Treasuries more attractive.

Some traders are reading the selloff as overdue. Gold hit a new all-time high near $2,450 an ounce on May 20, a level that even at the time looked stretched relative to its long-term average correlation to rates and the dollar. The retreat from that high now totals about 5%. A few analysts in the weekly Reuters poll said the rally ran ahead of the macro story, especially since central-bank buying – the main demand driver this year – has slowed somewhat after a torrid first quarter.

Physical demand is not providing a floor, either. India, the world's second-largest gold consumer, has seen domestic prices at a discount to the international benchmark for several weeks, importers said. That suggests local buying has not rushed in to catch the price dip, a pattern that sometimes marks the early stage of a deeper correction.

The People's Bank of China, the largest reported official-sector buyer for the past 18 months, released data Friday showing it added 2.7 tonnes to its reserves in May. That is down from 3.5 tonnes in April and well below the 9-tonne monthly average of late 2023. The PBOC's treasury bill buying in the same period has been rising, suggesting the central bank is diversifying its reserve additions rather than solely stacking gold.

The next test is Wednesday's U.S. CPI print for May, due at 8:30 a.m. New York time. If inflation runs hot, the dollar gets a fresh bid and gold likely tests $2,275, the level it bounced from in February. A softer CPI would reverse some of the dollar gains and give gold its first chance for a weekly recovery in a month. Read more about how gold traders are positioning around CPI.

The gold profile page tracks the real-time correlation shifts.