During the late Friday Asian trading session, spot gold prices experienced a significant drop, falling to around $4,569 per ounce, representing a decline of over $80 for the day. Earlier, gold had touched a low of $4,556.20 per ounce.
Gold has declined by approximately 3% so far this week, driven by market expectations of higher interest rates following a surge in U.S. inflation spurred by geopolitical tensions.
U.S. wholesale inflation accelerated in April to its fastest pace since 2022, while consumer price increases were the largest seen since 2023. A stronger U.S. dollar and a rise in the 10-year Treasury yield have weighed on gold, as the precious metal does not yield interest and is priced in dollars.
Data showed that the U.S. Producer Price Index (PPI) increased by 6% year-over-year in April, and the Consumer Price Index (CPI) rose to 3.8% year-over-year, moving further away from the Federal Reserve's 2% inflation target.
Traders have consequently increased their bets on interest rate hikes by the end of the year. According to the CME's FedWatch Tool, the market currently estimates a roughly 42% probability of a rate hike at the December Fed meeting, up from about 33% the previous day and significantly higher than the 21.5% seen on Monday.
Although gold is often viewed as a hedge against inflation, rising interest rates typically put pressure on the non-yielding asset.
Kansas City Fed President Schmid stated on Thursday that "inflation is the most urgent risk facing the U.S. economy." He added that the U.S. economy "has shown remarkable resilience" and the labor market is "operating effectively."
The Strait of Hormuz—a critical waterway for energy flows—remains effectively closed, and efforts to resolve the conflict involving Iran have reached a stalemate. This prolongs the energy crisis and sustains concerns about high inflation. Oil prices are on track for a weekly gain, with West Texas Intermediate (WTI) crude trading near $102 per barrel on Friday.
Analysts Daniel Hynes and Soni Kumari of ANZ Group Holdings Ltd. wrote in a report: "Inflation expectations, higher yields, and a stronger dollar are likely to continue pressuring gold in the near term." ANZ has postponed its $6,000 per ounce gold price target from early next year to mid-2027.
Bart Melek, Global Head of Commodities Strategy at TD Securities, stated: "There is a risk of a significant decline in gold if the Middle East conflict is not resolved." He added that energy product inventories and supply could sharply decrease, driving prices substantially higher and consequently pushing overall inflation upward.
Since its sharp decline early in the conflict, the precious metal has been trading within a relatively narrow range as investors weigh two-sided risks: inflationary pressures that could keep interest rates higher for longer, and concerning growth prospects that, with the conflict's persistence, might prompt authorities to adopt monetary easing policies.
Gold prices have fallen over 12% since the onset of the conflict involving Iran.
Despite recent underperformance, Ryan McKay, Senior Commodity Strategist at TD Securities, noted in a report that hedge funds may add gold to their portfolios in the coming days.
McKay said: "Our pricing scenarios still show commodity trading advisors (CTAs) adding to long positions under almost all simulated price paths."
Driven by a resurgence in speculative interest in industrial metals, silver prices have risen approximately 11% in May. The recent decline in the gold-to-silver ratio has led some traders to view silver as relatively cheap.
ANZ analysts noted in their report that silver's recent strong rally appears vulnerable in the short term. They stated: "Persistent market deficits and structural demand should continue to support silver prices over the medium to long term."
Meanwhile, India has further tightened gold import rules, days after raising import duties, to bolster protection for the rupee. This move is putting pressure on demand sentiment in the world's second-largest gold market.
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