Precious Metals Experience Sharp Selloff
Gold and silver prices faced considerable downward pressure on Friday, with a confluence of global and domestic factors triggering a broad-based decline across the bullion market. Investors reacted to stronger-than-expected US inflation figures, rising Treasury yields, and a strengthening dollar, alongside new import duty regulations in India.
On the Multi Commodity Exchange (MCX), gold futures for June delivery fell by approximately 2% to trade near Rs 1,58,872 per 10 grams, marking a decline of Rs 2,880. Silver futures experienced an even steeper drop, falling nearly 6% and approaching intraday declines of 9%, settling near Rs 2,73,601 per kg.
Five Key Factors Driving the Decline
1. Strong US Inflation Data
A primary catalyst for the selloff was fresh inflation data from the United States. US consumer inflation in April rose to 3.8%, its highest level since May 2023, accompanied by an acceleration in producer prices. Analysts noted that increasing energy costs are now feeding into broader inflationary pressures. This data significantly dampened expectations for any near-term interest rate cuts by the US Federal Reserve, as indicated by CME Group's FedWatch data. Gold, which typically benefits from lower interest rates due to its lack of income generation, becomes less attractive when rate cuts appear unlikely.
2. Rising US Treasury Yields
Following the surprising inflation report, US Treasury yields moved sharply higher. The benchmark 10-year US Treasury yield climbed close to one-year highs, increasing the opportunity cost of holding non-yielding assets like gold and silver. Higher yields make fixed-income assets relatively more appealing, prompting investors to reduce their exposure to precious metals.
3. Stronger US Dollar
The US dollar strengthened as investors adjusted their expectations regarding future monetary policy. Since gold is priced globally in dollars, a stronger greenback makes precious metals more expensive for international buyers, leading to reduced demand and lower prices. Kaynat Chainwala, Assistant Vice-President of Commodity Research at Kotak Securities, highlighted that hotter inflation and a stronger dollar stripped momentum from both metals.
4. India's New Import Rules
Domestic policy changes in India also contributed to the market headwinds. India recently increased gold and silver import duties to nearly 15% from approximately 6%, aiming to curb imports and bolster foreign exchange reserves. Additionally, the government imposed a 100 kg cap on duty-free gold imports for jewellery exporters. Under the revised structure, the effective import duty on both gold and silver now stands at 15%, with an additional 3% Integrated GST (IGST), bringing the total tax burden to 18.45% from an earlier 9.18%.
5. Elevated Crude Prices and Geopolitical Risks
Crude oil prices remained elevated amid ongoing concerns surrounding the Strait of Hormuz, a critical global energy route. Brent crude traded near $109 per barrel, while WTI hovered around $105. Higher oil prices have intensified inflation concerns, further reducing expectations of monetary easing. Geopolitical developments, including discussions between Donald Trump and Chinese President Xi Jinping, and ongoing tensions involving the US, Israel, and Iran, are also being closely monitored by markets, adding to investor caution.
Market Outlook
Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, noted that gold prices felt significant pressure, correcting sharply by nearly ₹3,000. He attributed this to rising crude oil prices and a stronger dollar index, alongside profit booking after recent rallies. Analysts anticipate that inflation data, policy actions, and global developments will continue to dictate the near-term movements in gold and silver prices.