Last two weeks were unique because we saw rising bond yields globally along with rising DM equities but falling precious metals. DM yields sold off sharply across jurisdictions last 2 weeks driven by elevated energy prices amid inconclusive headlines on the Middle East from the Trump-Xi summit, a sharp increase in UK political noise and heavy supply across several markets. We now see this trend continuing even if there is a Iran deal. The global economy is in the midst of a cyclical upturn in goods spending, which is putting upward pressure on prices. If our baseline view is realized—that is, that the Strait of Hormuz soon reopens and crude oil prices linger close to $100/bbl—a mix of goods sector cost pressures, tightening labor markets, and firm pricing power could push global core inflation well above 3%. Such an outcome would set the stage for a new round of global monetary policy tightening. Core inflation is now sticky globally because of reduced supply chain resilience, service inflation remaining high, rise in short term inflation expectations & the fact that inflation is not any more range bound. Hence in line of above facts, we see short end yields globally remaining elevated during H2CY26. This does not bode well for precious metals. Higher yields raise the opportunity cost of holding non-yielding assets, and markets are increasingly entertaining the possibility that the Federal Reserve may have to keep monetary policy tighter for longer or even raise rates again. We also looked at correlation of Gold & Silver with DM short end yields i.e. 2-year bonds. As expected, precious metals have a significant -ve corelation with short end DM yields. The more the DM short end yields remain elevated, the more precious metals become unattractive due to lack of carry. For precious metals, the risk-reward setup is becoming increasingly asymmetric. They are vulnerable to a larger correction if markets price in more rate hikes, stronger real yields and a firmer U.S. dollar which is our view too. Rising borrowing costs, persistent inflation, elevated energy prices and deteriorating fiscal dynamics could push markets closer to a breaking point. Hence, we now see Gold testing 4000 levels & Silver testing 65 levels in H2CY26. The stop to this view is Gold at 4900 & Silver at 85. CMP of Gold is 4500 and Silver is 75.
