During Wednesday's morning trading session, precious metals on China's domestic futures market showed notable weakness. By the close, the main Shanghai gold futures contract fell more than 1%, while the main Shanghai silver futures contract dropped more than 4%.

On the news front, global bond markets are currently experiencing a wave of selling pressure. Against the backdrop of expanding government debt levels and rising geopolitical risks, long-term borrowing costs in developed economies including the United States, Germany, and Japan have climbed to multi-decade highs. The rising financing costs for businesses and households are also making policy decisions more complicated.

Where the weakness originates

According to Zhou Mier, an analyst in the macro research group at Chaos Tiancheng Research Institute, the recent decline in precious metals prices is mainly attributed to the continuous climb in U.S. Treasury yields and the stabilization of the U.S. dollar index. The U.S. Empire State Manufacturing Index for August unexpectedly surged to 20.6, significantly exceeding market expectations. The data revealed resilient new orders and an expanding employment index, though the prices-paid index rose notably and delivery times lengthened. Following the release of this data, the 10-year Treasury yield climbed above 4.70%, and expectations for further Federal Reserve rate hikes have strengthened.

"The geopolitical situation in the Middle East also warrants attention. Trump has stated that no talks have been held with Iran and there are no plans for such discussions in the future, raising geopolitical risk levels. The persistently rising long-term Treasury yields reflect market concerns over expanding U.S. fiscal deficits, increased Treasury supply, and inflation remaining above the Fed's target for an extended period. The precious metals sector has now entered a verification phase following its rebound, with debt credit logic still providing some support for gold. Going forward, close attention should be paid to whether long-term Treasury rates rise further," Zhou noted.

Shifting market dynamics

Xiao Jingyu, an analyst in the macro and financial group at Xinhua Futures, holds a different perspective, arguing that the gold market is currently transitioning from a single interest rate game to a dual dynamic involving both "interest rate expectation adjustments" and "sovereign credit restructuring." The weakening of U.S. economic data in July has effectively alleviated the urgency for the Fed to raise rates in September. She maintains her baseline forecast that the Fed will keep rates unchanged for the remainder of the year, and believes that under the macroeconomic narrative of falling inflation expectations and rising sovereign credit risk, gold's valuation recovery trend will continue. In the long term, de-dollarization trends and global risk factors will continue to provide support for precious metals prices.