International gold prices hit a three-week low on Thursday as strong U.S. private employment data raised expectations of tighter monetary policy from the Federal Reserve. The price of gold fell to $1,932.32 an ounce, its lowest level in over three weeks. The strengthening U.S. dollar and rising bond yields also contributed to the decline in gold prices.
The U.S. dollar index rose to a four-week high of 102.822, while the yield on the 10-year U.S. bond reached 4.155%, the highest level since November of last year. This follows data released on Wednesday showing that U.S. private employment rose more than expected in July. The positive employment data suggests that the labor market is resilient and will help protect the economy from recession, supporting the hawkish stance of the Federal Reserve.
Investment demand for gold remains subdued as investors await the end of the Fed’s tightening cycle. The recent interest rate hike by the Fed and the possibility of another hike in September have created uncertainty in the gold market. The World Gold Council reports a 2.0% drop in demand for gold for the full year and expects a 10% decrease in demand from India, one of its major clients. Slowing economic growth in other major gold-buying countries has also weighed on the price of the precious metal.
However, the downgrade of the U.S. credit rating by Fitch may negatively impact the fundamentals of the U.S. economy. Investors anticipate a prolonged period of unease over the country’s debt situation, political polarization, and the weakening global role of the dollar.
Economists at TD Securities believe that economic data surprises, combined with the Fed’s restrictive interest rate policy, will drive down the U.S. economic surprise index. They expect the decline in forward curve yields to allow gold to rebound, potentially reaching $2,100 by late 2023.
In other news, the Bank of England is expected to raise interest rates by 25 basis points later on Thursday, reaching the highest level in almost 15 years. This decision is driven by inflation, which remains among the highest in major economies worldwide.