Gold prices have experienced a sharp retreat, falling by up to 2% to USD 4,560 per troy ounce, after previously trading around USD 4,700 before the decline began yesterday [1]. The drop is attributed to renewed expectations of US Federal Reserve rate hikes, following significantly higher-than-expected US producer price data for April [1]. Markets are now pricing in a 15-basis-point increase in US key interest rates by the end of the year, and a full 25-basis-point rate hike by March 2027 [1]. This shift in expectations has pushed the yield on 10-year US Treasuries to a one-year high of 4.54%, up about 20 basis points from the previous week, thereby increasing the opportunity cost of holding gold [1].
In addition to US monetary policy developments, gold faced further pressure from India, where the government raised the tax on gold imports from 6% to 15% [1]. This steep increase is expected to curb physical demand for gold in India, a major consumer market [1]. India's gold imports had already dropped to a 30-year low in April following a previous tax hike, and the latest increase could lead to even further declines in imports [1].
Commerzbank’s Carsten Fritsch notes that the new US Federal Reserve Chair may find it difficult to justify rate cuts under the current economic conditions, suggesting that the headwinds for gold could persist if rate hike expectations remain elevated [1].
CONCLUSION
Gold prices have come under significant pressure due to rising US rate hike expectations and a sharp increase in India's gold import tax. Both factors are likely to dampen demand and keep gold prices under pressure in the near term.