Market participants are reassessing the Federal Reserve's interest rate trajectory, leading to a broad decline in the prices of gold, silver, and Bitcoin.

While the market still widely anticipates the Fed will hold rates steady this week, traders have significantly increased their bets on a potential rate hike in October.

This shift follows last Friday's unexpectedly strong U.S. employment data, which bolstered expectations for further monetary tightening and triggered a sell-off across various asset classes.

On Wednesday, inflation concerns and expectations of a more hawkish Federal Reserve dampened risk sentiment, resulting in losses for precious metals.

As of 7:05 AM ET, spot gold had plunged 2.4% to $4,161.63 per ounce, while U.S. gold futures fell 2.2% to $4,194.90 per ounce.

Spot silver dropped 2% to $64.01 per ounce, having traded lower earlier in the session before paring some losses; silver futures declined 1.6%.

In pre-market trading Wednesday, related stocks and ETFs also weakened. The ProShares Ultra Silver ETF fell 2.8%, the iShares Silver Trust ETF dropped 1.4%, First Majestic Silver Corp. declined 3.8%, and Hecla Mining Company was down 3.1%.

Equity markets in Europe and Asia broadly closed lower, while U.S. stock index futures pointed to a weaker open. Bitcoin also faced selling pressure, falling approximately 1.3% to $61,049.25.

Ewa Manthey, a commodities strategist at ING, noted in an interview that the market focus has shifted from safe-haven demand back to interest rates and inflation, putting pressure on precious metals.

"Rising oil prices due to escalating Middle East conflict are increasing inflation risks, leading markets to bet that central banks will maintain tight monetary policy for longer, which is pushing up real yields," Manthey explained. "Gold and silver do not offer yield, so higher real yields are a clear negative for them."

Data from the CME FedWatch Tool shows money markets are pricing in a 98.2% probability that the Federal Open Market Committee will keep rates unchanged next week. However, traders are now pricing in roughly a 40% chance of a rate hike at the October meeting.

Refinitiv data indicates the market widely expects the European Central Bank to raise rates by 25 basis points at its monetary policy meeting on Thursday.

More than 100 days since the outbreak of conflict, traders who initially anticipated a Fed pivot to easing later this year have adjusted their views.

Manthey added, "Despite the tense geopolitical situation, macro fundamentals are currently driving the market. The impact of rising yields and hawkish rate expectations has now overtaken safe-haven buying. Precious metals remain vulnerable in the near term unless U.S. Treasury yields fall significantly or U.S. inflation data cools substantially."

Last Friday's stronger-than-expected U.S. jobs data further solidified expectations for Fed tightening, leading to a broad-based asset sell-off.

Rajeev Abrol, CEO of the global risk management platform Galytix, told CNBC that the decline in gold and silver is driven by the same logic as the tightening of global credit conditions. "Rising real yields combined with a stronger dollar increase funding costs for everyone reliant on dollar financing—emerging markets, highly leveraged credit, and entities facing refinancing pressure over the next 12 months. The precious metals market is simply the first to reflect this pressure," Abrol stated.

Rajeev Soni, Head of International Portfolio Management at Wave Digital Assets, commented via email on Wednesday that correlations across various assets and stocks have increased notably over the past two days.

"This is a classic market-wide deleveraging event: previously overcrowded positions and highly leveraged funds are being forced to sell quality holdings to cover losing positions, essentially a forced market clearance," Soni said. "Technically, both gold and silver have broken below their 200-day moving averages, a key indicator historically used to gauge medium-to-long-term trends and shifts in momentum."

However, Alex King, an investment strategist at Wellington Management, cautioned against simply categorizing commodities as a single trade based on geopolitics or inflation, advising investors to "deeply analyze the specific drivers and asset allocation value of categories like gold."

"Gold began a major bull market from late 2022, initially supported by central bank purchases, with subsequent inflows into gold ETFs further pushing prices higher; however, during periods of crowded positioning, the price has also seen significant pullbacks," King noted. "This current pullback in gold prices is more of a corrective phase for a cyclical over-extension, not the end of the long-term bull trend. While short-term return expectations have been adjusted downward, central bank diversification into gold reserves, continued inflows into gold ETFs, and expectations for a weaker dollar should continue to provide long-term support for gold prices."

Analysts at Citigroup warned in a research note this week that gold prices could fall another 20% by autumn.

Nevertheless, Alex King believes gold still has upside potential if multiple macro variables shift. "The allocation of central bank foreign exchange reserves is a key variable. The gold market is much smaller than the U.S. Treasury market, so even small adjustments in holdings by major holders like China and Japan can have a huge impact on gold prices," King explained. "If the current strong dollar trend reverses, diminishing the dollar's appeal as a reserve currency, demand for gold as an alternative store of value would correspondingly increase."