Data confirm the cooling inflation trend, with hawkish Fed signals capping upside [SMM Precious Metals Macro Analysis]

[Bearish for Precious Metals]
The escalating US-Iran conflict pushed up crude oil, and the risk of a rebound in inflation extended the high-rate cycle.
This week, the US-Iran military confrontation further intensified. Over several consecutive days, the US military launched airstrikes on military facilities along Iran’s coast and around the Strait of Hormuz and resumed a maritime blockade of Iranian ports. Trump threatened to impose a 20% fee on goods transiting the strait, while Iran retaliated by striking US military bases in the Middle East. Driven by supply disruption fears, WTI crude surged over 12% during the week to break above $80 per barrel, and Brent approached $86. The renewed surge in oil prices sparked concerns about a second inflation wave, and market expectations shifted toward a prolonged period of high US Fed rates, indirectly weighing on the valuation of non-yielding precious metals assets.

Warsh’s congressional testimony maintained a hawkish stance, reiterating zero tolerance for inflation and not ruling out rate hikes.
Fed Chairman Warsh attended the semi-annual monetary policy hearing before Congress this week and, in his first appearance, sent a resolute signal. Although the June CPI released on the same day cooled significantly, Warsh stated clearly that “this is just one data point and far from mission accomplished,” stressed zero tolerance for persistent high inflation, and noted that the interest rate tool remains on the table. The hawkish tone partially offset the easing expectations triggered by the inflation data. The probability of a September rate hike remained above 45%, capping the downside room for real interest rates and limiting the rebound potential of precious metals.

US Treasury yields continued to consolidate at highs, and institutional fund outflows persisted.
The 10-year US Treasury yield consolidated at highs in a 4.5%–4.7% range during the week, briefly dipping to 4.54% after the CPI release before rebounding quickly. The US dollar index fell under pressure to break below 100 early in the week, then regained its footing above 100.5 as oil prices rebounded. In terms of fund flows, holdings in the SPDR Gold Trust, the world’s largest gold ETF, continued to decline. With yields staying high, the carrying cost of precious metals remained elevated. Short-term sentiment stayed bearish, casting doubt on the sustainability of any rebound.

[Bullish for Precious Metals]
US June CPI and PPI both came in below expectations, signaling a continued easing of inflationary pressures.
The US June CPI, released on July 14, was up 3.5% YoY (expected 3.8%, prior 4.2%) and down 0.4% MoM, marking the first month-over-month decline since 2020. Core CPI was up 2.6% YoY (expected 2.8%) and flat MoM, the smallest increase since 2021. The following day, June PPI also surprised to the downside, falling 0.3% MoM (expected unchanged). The two inflation reports confirmed a cooling trend, and the market’s implied probability of a July Fed rate hike plummeted from nearly 50% before the data to around 10%. The central bank has increased its gold holdings for 20 consecutive months, with monthly purchases expanding gradually, building a bottom support.
As of end-June, China's official gold reserves reached 75.44 million ounces, up by 480,000 ounces MoM, marking the 20th straight month of accumulation. The monthly addition size has expanded for four consecutive months, hitting a near 16-month high. The central bank displayed a clear "buy the dip" pattern, accelerating purchases during the sharp gold price correction in June, reflecting a long-term strategy of reserve diversification. Coupled with moderately accommodative domestic monetary policy and ample liquidity, the official gold purchasing trend provides structural support for gold prices, with downside room being materially constrained.

Trump Calls for Interest Rate Cuts
On July 16, Trump stated, "I hope interest rates will come down. Pausing rate hikes is better than hiking. The U.S. should have the lowest interest rates in the world." Market expectations for rising political pressure on the Fed intensified.

[Macro Summary]
This week, precious metals showed a "first down, then up" pattern with wild swings. At the start of the week, pressured by the escalation of US-Iran conflict pushing up oil prices and rising inflation rebound expectations, gold and silver continued to weaken and hit bottom. On July 14, the June CPI data came in well below expectations, cooling rate hike expectations, and precious metals rebounded, with gold once surging to around $4,110. However, later, Walsh's hawkish congressional testimony and persistently rising oil prices led to partial giving back of gains. Currently, the market's core tension lies in the tug-of-war between substantial cooling of inflation data and the risk of inflation resurgence from geopolitical conflicts driving up energy prices, as well as the expectation gap between the Fed's hawkish stance and weakening data. The key upcoming observation windows are the U.S. June retail sales data and the FOMC meeting at end-July. The former will test how much consumption resilience supports inflation, while the latter will clarify the Fed's policy rate path, becoming a key variable in determining whether precious metals can open upside room.