Gold fell by up to 2% to USD 4,560 per troy ounce, down from about USD 4,700 before the decline began the previous day. The move followed stronger-than-expected US producer price data for April and a shift in rate expectations.
Markets are now pricing in tighter US monetary policy, including 15 basis points of US rate rises by the end of the year. A full 25-basis-point increase is priced in by March 2027.
US Treasury yields also climbed, with the 10-year yield reaching a one-year high of 4.54%. This was about 20 basis points higher than the prior week, increasing the opportunity cost of holding gold.
In India, the tax on gold imports rose from 6% to 15%, which is expected to reduce physical demand. India’s gold imports had already dropped to a 30-year low in April after a tax rise and may fall further.
Looking back to 2025, we saw the market begin pricing in rate hikes that eventually materialized, with the Fed delivering a 25-basis-point increase in early 2026. This has kept gold prices suppressed, with the metal currently trading around $4,610 per ounce. The headwinds identified last year from rising interest rate expectations remain firmly in place.
The opportunity cost of holding gold is significant, with 10-year US Treasury yields now hovering at 4.65%, making government bonds a more attractive safe haven for yield-seeking investors. April’s Consumer Price Index data, released last week, came in hotter than expected at 3.6%, reinforcing the view that the Fed will not be cutting rates anytime soon. This macroeconomic backdrop suggests continued pressure on non-yielding assets like gold.
The steep Indian import tax hike from last year continues to weigh on physical demand, a traditionally strong pillar of support for gold. Official import data for the first quarter of 2026 showed an 18% decline compared to the same period last year, confirming a sustained slump in consumer buying. This pattern mirrors what we saw between 2013 and 2016 when previous tax increases also heavily curtailed official demand.
Given this environment, we should consider positioning for further weakness or range-bound price action in the coming weeks. Buying put options on gold futures with strike prices below the $4,500 support level offers a way to profit from a potential downward move driven by rate-hike fears. This strategy provides defined risk if the market unexpectedly rallies.
For those expecting sideways movement, selling call options with strike prices above the recent resistance level of $4,750 could be a viable strategy to generate income from premiums. The persistent strength of the US dollar, which just hit a six-month high against a basket of currencies, further caps gold’s upside potential. This makes selling out-of-the-money calls an attractive proposition.
However, we must remain aware of geopolitical tensions in the South China Sea, which could trigger a flight to safety and a sudden spike in gold prices. A small allocation to long-dated, out-of-the-money call options could serve as a low-cost hedge against such an unforeseen event. This provides protection for an otherwise bearish or neutral portfolio.
