Precious metals slump on rising bond yields; gold likely to remain bearish

Gold and silver prices slumped on Friday as firmer Treasury yields and a stronger dollar weighed on sentiment. 

Higher inflation concerns due to rising energy prices also dampened sentiments in the precious metals market on Friday. 

At the time of writing, the COMEX gold contract was at $4,573.30 per ounce, down 2.4% from the previous close.

Silver was nearly 8% lower at $78.705 per ounce. 

Silver prices were trading over $87 per ounce in the previous session, while gold was steady around $4,700 an ounce on Thursday. 

Key factors driving the price slump

A dollar increase of more than 1% this week has made bullion, which is priced in the greenback, more costly for those holding other currencies.

Gold's appeal diminished as the benchmark 10-year US Treasury yields climbed to a near one-year peak, thereby raising the opportunity cost of holding the precious metal.

Meanwhile, Brent crude oil prices rose nearly 6% this week, trading above $107 per barrel.

This increase is primarily due to the ongoing conflict in Iran, which has kept the crucial Strait of Hormuz mostly closed.

Gold prices have fallen approximately 13% since the outbreak of the US-Iran conflict on February 28.

Hopes for immediate US interest rate cuts have diminished due to this week's inflation reports, which indicated a risk that escalating energy prices could trigger broader inflation across various goods and services.

Although gold is traditionally considered an inflation hedge, its status as a non-yielding asset means that high interest rates typically exert downward pressure on its value.

“The decline (in gold) was driven by a fresh wave of inflation data that cemented expectations the Federal Reserve will hold rates at elevated levels through year-end — and increasingly, that the next move could be a hike rather than a cut,” Gary Wagner, technical analyst at Kitco News, said in a report.

Trump-Xi meeting and rate headwinds

The highly anticipated Trump-Xi summit in Beijing, the month's most closely watched diplomatic event, did not provide the market boost that bullish investors were expecting. 

On the first day of discussions, a joint statement was released confirming two key points: both nations agreed that Iran must not develop nuclear weapons, and they endorsed the principle of unimpeded transit through the Strait of Hormuz.

This latter point was seen as a measure to help ease tensions in the energy market.

“For gold, an inconclusive summit preserves geopolitical uncertainty — a factor that ordinarily supports safe-haven demand — but the rate headwind proved the dominant force on Thursday, overwhelming any residual flight-to-safety bid,” Wagner added. 

Additionally, Thursday's US retail sales, up 0.5% as expected, offered no relief.

Strong consumer spending, coupled with hot inflation data, reinforces the Fed's "on hold" stance, as the central bank lacks the rationale to ease. 

The strengthening dollar, driven by inflation and consumption figures, further pressured dollar-denominated gold prices for overseas buyers.

Future direction and price forecasts

Meanwhile, ANZ has decreased its year-end gold price target by $200, setting the new figure at $5,600.

This revision is due to anticipated pressure on prices from factors such as a stronger dollar, higher yields, and inflation expectations.

The immediate variable is the continuation of the Trump-Xi talks on Friday.

Should there be a credible indication that the Strait of Hormuz will reopen, or that a diplomatic solution for the Iran conflict is being formed, energy prices would likely fall sharply, allowing inflation expectations to moderate, according to Wagner. 

These conditions would quickly change the Federal Reserve's outlook and, consequently, the near-term direction for gold.

Until such a signal emerges, the momentum remains with the bears.