Gold and Silver Prices Fall Amid Inflation and Fed Rate Hike Fears

Precious metals were among the assets firmly in negative territory on Wednesday, as fears about inflation and the Federal Reserve's interest rate path weighed on investor sentiment.

By 7:05 a.m. ET, spot gold was down 2.4% to trade at around $ 4,161.63 an ounce. U.S. gold futures also fell 2.2% to settle at $ 4,194.90/oz.

Stocks and funds linked to gold and silver also fell in pre-market trading on Wednesday. The ProShares Ultra Silver ETF was last seen trading 2.8% lower, while the iShares Silver Trust ETF was down by 1.4%. First Majestic Silver shed 3.8%, while Hecla Mining was 3.1% lower.

Stocks in Europe and Asia were broadly lower in their respective trading sessions, while U.S. equity futures fell ahead of Wall Street's regular session. Bitcoin also came under further pressure, losing around 1.3% to trade at $61,049.25.

Ewa Manthey, a commodities strategist at ING, told CNBC that gold and silver are coming under pressure as market focus shifts back to rates and inflation rather than pure safe-haven demand.

"The escalation in the Middle East is pushing oil higher and lifting inflation risks, which in turn is reinforcing expectations that central banks stay tighter for longer," she said. "That's pushing real yields higher — a clear headwind for non-yielding assets like gold and silver."

Money markets are currently pricing in a 98.2% chance that the Fed holds its key interest rate steady at its FOMC meeting next week, according to the CME's FedWatch tool. Traders now see a roughly 40% chance of a hike by the Fed's October meeting.

The ECB is also overwhelmingly expected to raise interest rates by 25 basis points at its own monetary policy meeting on Thursday, LSEG data shows.

Prior to the outbreak of the U.S.-Iran war, which recently crossed the 100-day mark, traders had been expecting the Fed to take a more dovish stance later this year.

"Despite geopolitical tension, the dominant driver right now is the macro side: higher yields and a more hawkish rate outlook are outweighing the safe-haven bid," Manthey said. "Near term, metals remain vulnerable unless we see a clear shift lower in yields or softer U.S. inflation data."

Last Friday, various assets sold off after hotter-than-expected U.S. jobs data reinforced bets on a rate hike from the Fed.

Raj Abrol, CEO of global risk management platform Galytix, told CNBC that gold and silver were being moved by "the same force tightening credit conditions everywhere else."

"When real yields back up and the dollar firms at the same time, the cost of capital rises for dollar-funded EMDE borrowers, leveraged credits and anyone with a refinancing wall in the next twelve months," he said. "The metals desk is just where it shows up fastest."

Rajiv Sawhney, Head of International Portfolio Management at Wave Digital Assets, told CNBC in an email on Wednesday that various assets had shown greater correlation with equities over the last two days.

"This is a classic case of broad-market deleveraging, in which overextended positioning and leverage are forcing the sale of good positions and assets to fund poor ones; essentially a flushing out in the market,"

"On a technical basis, both gold and silver have taken out their 200-day moving averages, which have historically been a decent indicator of trend/momentum regime changes over longer time periods."

But Alex King, Investment Strategy Analyst at Wellington Management, cautioned against treating commodities as a single geopolitical or inflation trade, urging investors to "instead look under the hood at the distinct drivers and portfolio roles of individual exposures such as gold."

"Gold has been in a broadly bull market since late 2022, first supported by central bank buying and later reinforced by ETF inflows, albeit with sharper corrections as positioning became stretched,"

"Gold's recent pullback may reflect cyclical excess rather than a broken trend, and while return expectations may be lower from here, longer-term support from reserve diversification, central bank demand, ETF inflows, and potential U.S. dollar weakness appears more durable."

In a note this week, Citi analysts warned gold could slump a further 20% by the autumn.

King said, however, that gold could see upside if certain shifts occur.

"Central Bank reserve reallocation dynamics play a role," he said. "Given the relatively small market size of gold versus U.S. Treasuries, even marginal shifts by major bondholders like China and Japan could have outsized impact on gold. The US dollar's recent strength could also revert back to weakening and weigh on the dollar's standing as a reserve asset, reinforcing gold's appeal as an alternative store of value."