According to a weekly precious metals analysis report, Rhona O'Connell, Head of Market Analysis for EMEA and Asia at StoneX, presented a core view that despite escalating tensions between the US and Iran, interest rate movements continue to dominate gold and silver prices, with both metals remaining under pressure and possessing downside potential.

Evaluating factors including physical demand, inflation data, oil price trends, Federal Reserve policy, and futures and ETF holdings, the persistent rise in the 10-year US Treasury yield is exerting long-term pressure. Market funds, both long and short, are simultaneously exiting precious metals, with only Indian physical demand providing weak support. The Federal Open Market Committee meeting on July 28-29 will conclude with an interest rate decision announced at 2:00 AM Beijing Time on July 30. Current divergent views among committee members and ongoing expectations for tighter policy continue to weigh on precious metals valuations.

Physical Demand Shows Divergent Trends, Insufficient to Reverse Weakness

O'Connell stated that previous market uncertainty led retail investors to adopt a wait-and-see approach. While small-scale buying emerged in parts of the Far East, selling occurred simultaneously in other regional markets, resulting in an overall net neutral demand impact. Trading activity for gold in the Middle East is subdued, with prices persistently trading at a discount. As the world's largest silver jewelry consumer, accounting for 90% of global demand, India has seen a slight uptick in purchasing interest for gold and silver. However, this provides only limited support and is insufficient to drive a price rebound.

Professional institutions engage in short-term trading primarily around interest rate decisions and unexpected geopolitical news, maintaining a watchful stance during regular periods. The market lacks sustained buying power, making it likely that gold and silver will maintain a narrow range of fluctuation, with the probability of further decline outweighing that of a sustained rise.

Inflation Lags Oil Prices, Creating Policy Dilemma for Fed

June CPI component data highlighted the significant pull from the energy sector on inflation, with energy accounting for 80% of consumer spending that month. Combined with the pass-through of energy costs to transportation and manufacturing, this indirectly pushed up overall prices. The decline in June's inflation figure relied entirely on a short-term drop in energy prices, with institutions forecasting a rebound in July's inflation data. Although West Texas Intermediate crude has retreated from its April peak, it remains significantly higher year-on-year. Geopolitical risks in the Middle East are supporting elevated oil prices. Even if subsequent geopolitical premiums fade and oil prices decline, the lengthy supply chain repair cycle means inflationary pressures will be difficult to resolve quickly.

Persistently high inflation presents a complex choice for the Federal Reserve Chair. Views within the FOMC are split, with half the members supporting further rate hikes if inflation persists, while the remaining members advocate holding rates steady. Formerly dovish member Chris Waller has shifted to a more hawkish stance, stating that stronger inflation could warrant a rate hike, while also expressing concern that excessive tightening could drag on the economy. He indicated that several consecutive months of cooling data would be needed to confirm inflation is under control.

Rising US Treasury Yields Apply Significant Pressure on Valuations

The 10-year US Treasury yield has climbed from below 4% at the end of February to 4.6%, becoming the core bearish factor suppressing gold and silver. Gold offers no interest yield, leading to capital diversion towards higher-yielding assets. Silver, which also possesses industrial attributes, similarly weakens in a rising interest rate environment.

Observing futures positioning data, gold long positions have increased slightly but the total remains 23% below the 12-year average. Silver long positions have contracted sharply, over 40% below the average, while short positions have increased slightly in tandem, indicating a stronger bearish sentiment among funds.

Global gold ETFs have seen minimal net inflows this year, with continued outflows from North America offset only by slight inflows in Asia. Silver ETFs have experienced significant outflows year-to-date, with only a small amount of bargain-hunting capital attracted by last weekend's low prices. The overall trend of capital exiting the sector has not reversed.

Key Takeaway

Considering all dimensions—supply/demand, macro policy, and fund positioning—the safe-haven buying driven by geopolitical conflict is weak. The core theme suppressing gold and silver remains the cycle of rising interest rates.

Divergent physical demand, shrinking futures long positions, and continued ETF outflows collectively form multiple headwinds. The Federal Reserve's interest rate decision at 2:00 AM Beijing Time on July 30 will be a key short-term variable. If hawkish signals are released, gold and silver could test further lows. Only with sustained cooling of inflation and a decline in US Treasury yields can precious metals stage a phased recovery.