Market dynamics on Tuesday were heavily influenced by the Federal Reserve's hawkish signals released last week. Despite a decline in oil prices following the U.S.-Iran agreement, fading safe-haven sentiment has intensified market concerns over monetary tightening and AI bubble risks. This has triggered a liquidity shock, with U.S. tech stock declines spilling over to Asian markets. A strengthening U.S. dollar has further pressured commodities, particularly precious metals.
Amid a continued slide in international gold and silver prices, the main Shanghai gold futures contract fell below the 900-yuan mark again, closing at 897.9 yuan per gram, down 2.04%. International silver prices dropped near the $60 level, a low for the year, while the main Shanghai silver contract plunged over 6% to below 15,000 yuan per kilogram, hitting its lowest point since mid-December.
Key Market Drivers
Markets are front-running expectations of significant Federal Reserve interest rate hikes. Concurrent rises in real interest rates and the U.S. dollar index are putting downward pressure on precious metal prices. As expected, the Fed kept rates unchanged for a fourth consecutive meeting last Thursday. However, the policy statement saw notable changes, removing hints of further rate cuts and details of voting members' positions. It no longer reiterates close monitoring of risks to both employment and inflation, instead emphasizing a commitment to price stability. The statement reaffirmed high economic uncertainty due to Middle East conflicts, acknowledged that inflation remains elevated partly due to energy price increases, and noted steady economic expansion with the unemployment rate largely unchanged.
The updated dot plot shows nine officials project rate cuts this year, with six of them expecting at least two cuts. In his first press conference, new Chair Warsh stated the committee is "clear and united" in its commitment to price stability, aiming for the 2% inflation target—a message interpreted by markets as hawkish. He also announced the formation of five working groups to initiate a systematic review of monetary policy implementation, covering communication, the balance sheet, data usage, productivity and employment, and the inflation framework. The goal is to reduce the Fed's reliance on forward guidance and market communication, shifting towards data-dependent decisions for the market to interpret, ultimately aiming to enhance the Fed's credibility. While these reform ideas are currently only verbal and their implementation timeline awaits further work, markets judge that reduced Fed guidance could lead to greater volatility as decisions become more reliant on economic data.
Given the objective constraint of the U.S. government's substantial debt burden, the likelihood of the Fed enacting sharp rate hikes is relatively small. However, markets often exhibit irrational trading during panic, with predictions skewing towards the most pessimistic scenarios. As some institutions begin to anticipate the possibility of the Fed raising rates up to three times in the second half of the year, combined with declines in U.S. tech stocks due to AI bubble concerns spreading to other equity markets, the liquidity strain from rising real rates and a stronger dollar is hitting precious metals particularly hard, making them a leading decliner among commodities.
Outlook and Strategy
Under the current expectation of Fed tightening, continued trading on macro headwinds is likely to trigger further risk-off sentiment. In the absence of new bullish catalysts, commodities like precious metals and other risk assets face indiscriminate selling pressure. Upcoming U.S. PCE inflation data and earnings reports from U.S. tech companies this week could act as catalysts for significant market swings. The correction in gold and silver is not yet over. Investors are advised to adopt a cautious, watchful stance. In an environment of rising volatility, appropriately buying put options may be considered.
Risk Warnings
Key risks include a breakdown in U.S.-Iran negotiations leading to renewed escalation of conflict, and the Fed raising rates beyond expectations, which would further pressure precious metals.
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