Gold Falls, Recording Weekly Decline as Tensions Escalate and Expectations of Rate Hike Increase

Gold prices fell at the close of last week's trading, recording a weekly decline, as rising oil prices linked to the conflict in the Middle East stoked inflation fears and reinforced expectations of tighter U.S. monetary policy.

Spot gold fell 0.4% to $4,103.23 per ounce, marking a 1.7% decline since the start of the week. U.S. gold futures for August settled about 0.7% lower at $4,113.70 per ounce.

"The main factor here is the renewed tensions between the United States and Iran, where investors generally do not want to hold gold and silver at this time, which explains this rise toward $4,100," said Bart Melek, global head of commodity strategy at TD Securities.

The International Energy Agency added on Friday that the recent escalation in hostilities between the United States and Iran could upend its forecast of a significant oil market surplus next year. Oil prices were set for a weekly gain, driven by supply concerns amid renewed U.S.-Iran strikes.

Melek added: "All signs point to market concern about inflation, especially with the rebound in oil prices over the past few days. This will keep central banks, particularly the Federal Reserve, on constant alert." Traders estimate a 69% probability of a rate hike in September.

Minutes from the Federal Reserve's June meeting showed a hawkish split with growing concerns about rising inflation. Investors are now awaiting next week's inflation data and testimony from Fed Chair Kevin Warsh for more insights into the monetary direction.

Meanwhile, gold traded at a steep discount in India this week, while demand in China remained steady after the central bank reported in June its largest monthly increase in gold reserves in over two and a half years.

In other precious metals markets, spot silver fell 0.7% to $59.56 per ounce, platinum rose 0.4% to $1,616.72, and palladium gained 2.2% to $1,274.50.

Precious metals analysts at Investing.com said gold headed for weekly losses due to Iran and interest rate uncertainty. Participants in the precious metals market this week had to weigh the implications of the latest exchange of strikes between Washington and Tehran on monetary policy, which sent oil prices sharply higher.

"Gold found some support from expectations of limited escalation in the Middle East conflict, despite previous concerns that the rebound in energy prices could push the Fed to keep interest rates higher for longer to combat persistently high inflation," analysts at ANZ Bank said.

Nevertheless, shipping traffic through the Strait of Hormuz declined this week as shipping companies exercised caution, raising supply concerns and pushing oil prices higher. The geopolitical dimension reemerged amid rapid changes in inflation dynamics. Minutes of the Federal Reserve's June 16-17 meeting, released earlier this week, showed an even split among policymakers on interest rate expectations.

The minutes, along with the Fed's report to Congress released on Friday, also showed that policymakers remain concerned about inflationary pressures stemming not only from the Middle East conflict but also from AI-related demand and tariffs.

Focus now turns to key U.S. inflation indicators due next week. The June Consumer Price Index report will be released on Tuesday, followed by the Producer Price Index data for the same month on Wednesday.

Annual increases in both headline CPI and PPI in May hit their highest levels since April 2023 and November 2022, largely due to the impact of higher oil prices from the Iran war; crude oil prices had recently fallen to pre-war levels before rising this week. As a result, analysts believe May readings were likely the peak.