Gold heads for biggest weekly loss in six weeks amid rising inflationary pressures

Gold was on track for its biggest weekly loss in six weeks on Friday, as escalating clashes between the United States and Iran drove oil prices higher, increasing inflationary pressures and bolstering the likelihood of a U.S. interest rate hike.

Spot gold rose 0.6% to $3,993.22 per ounce by 07:58 GMT, after touching its lowest since July 1 earlier in the session. U.S. gold futures for August delivery edged up 0.1% to $3,996.90.

The metal has lost 3% so far this week, its biggest decline since June 1, as the conflict in the Middle East overshadowed support from weaker-than-expected U.S. inflation data for June released this week.

The U.S. Central Command announced Thursday evening that it had concluded the sixth consecutive night of strikes on Iran. The command said the attacks aim to further weaken Iran's military capabilities and 'hold Iran accountable' for attacks targeting commercial shipping vessels. Iranian media also reported that the latest U.S. strikes targeted some civilian infrastructure, including five bridges and a train station.

All this has made the fate of the Strait of Hormuz uncertain. Oil tanker traffic through the narrow waterway has been disrupted again, dashing hopes held just weeks ago that a fragile ceasefire agreement would allow flows to resume.

Tim Waterer, chief market analyst at KCM Trade, said: 'Gold is seeing a modest rise today after its dip below $4,000 attracted some bargain hunters.' However, Waterer added: 'Geopolitical risks in the Middle East persist, with inflation and yield concerns being the main factors capping gold's upside.'

Oil prices have risen about 12% this week as the escalating U.S.-Iran conflict raised supply concerns. This oil price surge threatens to reignite inflation fears and increase the likelihood of interest rate hikes. Gold, which yields no interest, typically struggles in a high-interest-rate environment as investors seek assets offering better returns.

Lorie Logan, President of the Federal Reserve Bank of Dallas, became the first new colleague of Fed Chair Kevin Warsh to publicly call for an interest rate hike. Meanwhile, Fed Vice Chair Philip Jefferson indicated he would be open to raising rates if inflation does not improve soon. Traders are pricing in a 73% probability of a rate hike in December.

Gold discounts in India widened to a one-month high this week, as hopes of lower prices kept buyers on the sidelines, while premiums in China remained largely steady.

Other precious metals markets were affected by gold's decline, with spot silver falling 0.1% to $55.45 an ounce, platinum dropping 1.9% to $1,586.63, and palladium slipping 1% to $1,237.47. All three metals are on track for weekly losses.

At the same time, fears of fallout from rising energy prices helped sustain demand for the U.S. dollar as a safe haven. This in turn could negatively impact gold, as a stronger dollar makes the yellow metal more expensive for foreign buyers.