Is inflation completely out of control? US bond yields and the US dollar surge together, causing precious metals to suffer a "double kill": gold falls by 2%, while silver plummets by over 6%.

Due to the escalation of inflation caused by the Middle East conflict, the market's expectation for the Federal Reserve to maintain higher interest rates was strengthened, leading to a drop in both gold and silver prices. As of the time of writing on Friday, spot gold fell by 2% to $4560 per ounce, a cumulative drop of about 3% since last Friday; spot silver, which had briefly risen to near $90 per ounce earlier in the week, has now mostly given back its gains, falling by over 6% to $78 per ounce. The strategic Strait of Hormuz, which serves as a crucial global energy transport passage, remains almost closed, while peace talks between the US and Iran have stalled, exacerbating concerns that high oil prices will worsen inflationary pressures and thus boosting expectations for Fed rate hikes. In this context, US bond yields and the US dollar have risen together. On Friday, the 10-year US bond yield rose to 4.530%, the highest level since May 2025; the 30-year US bond yield hovered above 5%; the 2-year US bond yield, which is particularly sensitive to interest rates, crossed the 4% mark to reach its highest level in months. Additionally, the US dollar is expected to rise by 1.3% this week, marking its largest weekly gain in two months. The rise in US bond yields and the US dollar have directly suppressed the prices of gold and silver priced in US dollars. Analysts Daniel Hynes and Soni Kumari from ANZ Bank wrote in a report, "The heating up of inflation expectations, higher yields, and a stronger dollar may continue to put pressure on gold in the short term." ANZ Bank has also delayed its target time for gold prices to reach $6000 per ounce from early next year to mid-2027. Meanwhile, India has further tightened its gold import policies to alleviate pressure on currency depreciation and stabilize foreign exchange reserves. According to a recent announcement from the Indian government, gold imports exceeding 100 kilograms will be placed under a "pre-authorization" management mechanism. The announcement also stated that subsequent import permits will only be granted after the relevant companies have completed at least 50% of their export requirements. This move indicates that India is further tightening control over gold inflows to reduce the pressure caused by gold imports on foreign exchange reserves. Just a few days ago, the Indian government announced a significant increase in gold and silver import duties, with the tax rates more than doubling compared to before, to support the Indian rupee exchange rate. As the world's second-largest consumer of gold, these series of restrictive measures by India are expected to have a significant impact on global gold demand, further exacerbating downward pressure on the precious metals market. Gold has been trading in a sideways range in recent weeks After a significant drop at the onset of the Middle East conflict, gold has been trading within a relatively narrow range in recent weeks. Investors are currently weighing two factors. On one hand, the risk of inflation may keep interest rates high; on the other hand, as the conflict continues, concerns about economic growth may prompt major central banks to turn towards accommodative policies. Since the start of the Middle East conflict at the end of February, gold has fallen by over 13%. Despite gold's recent lackluster performance, Ryan McKay, Senior Commodities Strategist at TD Securities, stated in a report that hedge funds may continue to increase their long positions in gold over the next few days. He said, "Our price scenario analysis shows that under almost all price path simulations, CTA (commodity trading advisor) funds may continue to increase their long positions." Additionally, silver's recent rise has been driven by renewed market attention to speculative trading in industrial metals like copper. The gold-silver ratio has been steadily declining, leading some traders to believe that silver is becoming relatively cheaper. Despite ANZ Bank analysts noting in their report that this strong upward trend appears fragile in the short term, they also pointed out that "continued market supply deficits and structural demand will continue to support silver prices in the medium to long term." It is worth mentioning that in addition to gold and silver, the expectations of rate hikes and the resulting rise in bond yields have also halted the rally driven by artificial intelligence (AI) in the stock market, dragging down copper, which is widely used in AI data centers - as of the time of writing, LME copper futures fell by nearly 3% to $13,600 per ton. Inflation concerns reignite and Fed policy expectations shift The latest data released this week confirms the inflation pressure facing the US economy. Data released on Tuesday showed that due to the ongoing rise in gasoline prices driven by the Middle East conflict and the surge in food and grocery costs, US inflation continues to accelerate, with the Consumer Price Index (CPI) rising by 3.8% year-on-year in April, marking the fastest growth since 2023. Data released on Wednesday showed that the US Producer Price Index (PPI) soared by 1.4% month-on-month in April, the largest monthly increase since March 2022, far exceeding the market's expectation of 0.5%; the year-on-year increase reached 6.0%, the highest level since December 2022, significantly surpassing the market's expectation of 4.8%. The sharp changes in oil prices and the inflation environment have forced the market to historically reverse its pricing of the Federal Reserve's policy path. Just before the Middle East conflict erupted in February, overnight index swap markets showed that traders generally expected the Fed to cut rates by about 50 basis points over the full year of 2026. However, the energy shock sparked by the conflict has completely shifted the prospective interest rate outlook. Currently, the CME Group's "FedWatch" tool shows that the market has largely ruled out the possibility of a rate cut by the Fed before the end of 2027. Instead, the market expects a 39% probability of a 25 basis point rate hike by the end of this year and a 37% probability of a 25 basis point rate hike by the end of October 2027. In fact, the shift in expectations for Fed policy had already been reflected in internal dissent within the Fed. Last month's Federal Open Market Committee (FOMC) meeting saw the highest level of dissent since 1992 - with as many as three officials voting against the policy statement favoring a dovish stance. Even Fed Governor Lael Brainard, who had been most dovish, significantly softened her stance and sharply downgraded her rate cut expectations. The upcoming appointment of the new Fed Chair Powell has also drawn widespread market attention, with expectations that he will face difficult policy choices. Fed officials have been sending hawkish signals in recent days. For example, Kansas City Fed President Esther George said on Thursday that inflation is the biggest risk facing the US economy. Minneapolis Fed President Neel Kashkari said on Wedne...