Gold and silver prices fell sharply as rising U.S. inflation, fueled by Middle East tensions, strengthened market expectations that the Federal Reserve will maintain higher interest rates for longer. As of Friday, spot gold was down 2%, trading near $4560 per ounce, marking a decline of approximately 3% since the previous Friday. Spot silver, which had climbed to around $90 per ounce earlier in the week, erased most of those gains, plunging over 6% to around $78 per ounce.
Concerns intensified as the Strait of Hormuz, a critical global energy chokepoint, remained largely closed, and peace talks between the U.S. and Iran stalled. This heightened worries that elevated oil prices would exacerbate inflationary pressures, thereby boosting expectations for Fed rate hikes. In this environment, U.S. Treasury yields and the U.S. dollar advanced in tandem. The yield on the 10-year Treasury note rose to 4.530%, its highest level since May 2025. The 30-year yield hovered above 5%, while the more rate-sensitive 2-year yield crossed the 4% threshold, reaching a multi-month high. The U.S. dollar was on track for a 1.3% weekly gain, its largest in two months.
The rise in yields and the dollar directly pressured dollar-denominated gold and silver. Analysts noted that "heightened inflation expectations, higher yields, and a stronger dollar are likely to continue weighing on gold in the near term." One bank also postponed its forecast for gold to reach $6000 per ounce from early next year to mid-2027.
Simultaneously, pressure on the precious metals market came from India's move to tighten gold import policies to alleviate pressure on its currency and stabilize foreign exchange reserves. A new government notification stated that gold imports exceeding 100 kilograms will be subject to a "prior authorization" mechanism. Furthermore, subsequent import permits will only be granted after a company has fulfilled at least 50% of its export obligations. This follows a recent significant hike in import duties on gold and silver. As the world's second-largest gold consumer, India's restrictive measures are expected to significantly impact global gold demand, adding to the downward pressure on the sector.
After an initial sharp decline following the outbreak of Middle East hostilities, gold has traded within a relatively narrow range in recent weeks. Investors are weighing two opposing factors: the risk that persistent inflation could keep rates high, and the possibility that prolonged conflict and growth concerns might push central banks toward easing. Since the conflict began in late February, gold has fallen over 13%. Despite its recent subdued performance, analysis suggests hedge funds may continue adding to gold positions in the coming days.
Silver's recent rally was also partly driven by renewed speculative interest in industrial metals like copper. The gold-to-silver ratio has been declining, which some traders interpret as silver becoming relatively cheaper. While the recent strong gains in silver may appear fragile in the short term, analysts point out that "ongoing market supply deficits and structural demand should continue to support silver prices over the medium to long term."
Notably, the surge in rate hike expectations and resulting higher bond yields have also halted the AI-fueled stock market rally and dragged down copper, widely used in AI data centers. LME copper futures were down nearly 3%, trading around $13,600 per ton.
Recent data confirmed mounting U.S. inflationary pressures. April's Consumer Price Index rose 3.8% year-over-year, the fastest pace since 2023, driven by rising gasoline and food costs. The Producer Price Index for April surged 1.4% month-over-month, the largest increase since March 2022, far exceeding expectations, with a 6.0% annual rise.
This dramatic shift in oil prices and the inflation landscape has forced a historic reversal in market pricing for the Fed's policy path. Before the Middle East conflict, traders expected about 50 basis points of rate cuts in 2026. Now, market tools show expectations for a Fed rate cut before the end of 2027 have been virtually eliminated. Instead, there is a 39% probability of a 25-basis-point hike by year-end and a 37% chance of a hike by late October 2027.
This shift in expectations was evident in significant internal dissent at the last Federal Open Market Committee meeting, which saw the highest level of opposition since 1992. Even previously dovish officials have notably softened their stance, drastically scaling back rate cut expectations. The impending new Fed Chair's policy stance is also under close market scrutiny.
Fed officials have recently reinforced a hawkish tone, emphasizing that inflation remains the biggest risk to the economy and that the central bank must return inflation to its 2% target. Their comments suggest the Fed is "keeping the door open" for potential rate hikes.
Several major Wall Street banks have also pushed back their forecasts for Fed rate cuts. Analysts argue that recent employment and inflation data support the case for the Fed holding rates steady at least through year-end. One bank's economics team now expects the Fed will not cut rates until July 2027, a significant shift from a prior forecast for a September cut this year.
The current consensus indicates the Fed has entered a "defensive mode." Interest rates are likely to remain in the 3.50%-3.75% range or higher until a clear path back to 2% inflation is established. The post-April meeting communications revealed the Fed's internal debate between fighting inflation and supporting growth has reached its most intense level in years. With a leadership transition underway, the June meeting will be a key window into the new Chair's policy style. However, amid stubborn inflation and geopolitical risks, policy is likely to remain in a holding pattern in the near term.
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