Spot gold price fell 0.7% to $4,032.19 per ounce

Gold prices fell on Thursday amid ongoing tensions in the Middle East, which heightened inflation concerns and added uncertainty to the path of US interest rates.

Spot gold fell 0.7% to $4,032.19 per ounce by 08:34 GMT, while US gold futures declined 0.4% to $4,037.20.

Nico Tzaporas, senior market analyst at Jefferies' TradeDot com site, said: "Inflation and the geopolitical situation continue to affect gold prices. The ongoing US strikes against Iran and the disruptions in the Strait of Hormuz are supporting oil prices, keeping inflation risks elevated."

The United States launched two waves of attacks on Iranian coastal defenses and missile sites on Wednesday, after reimposing a naval blockade on its ports, and Iran retaliated by striking US military positions in neighboring countries.

This latest escalation comes days after the collapse of a fragile ceasefire, raising concerns about control over the Strait of Hormuz. Crude oil prices are expected to post a weekly gain. High energy prices fuel inflation fears, strengthening expectations of interest rate hikes and reducing gold's appeal as a non-yielding safe haven.

Traders are pricing in a 51% probability of a rate hike in September. Federal Reserve Chairman Kevin Warsh announced this week his determination to lower inflation without specifically hinting at how to do so.

Meanwhile, data released on Tuesday showed a slowdown in US consumer inflation in June, pushing spot gold prices up more than 2% immediately after the report. Data released on Wednesday also showed a decline in the producer price index.

Tzaporas added: "The decline in both consumer and producer price indices reduces the urgent need for monetary tightening by the Fed, and this could pave the way for gold to resume its recovery eventually. However, this slowdown in inflation may be short-lived as oil prices rise again. Any de-escalation or resumption of peace talks would be the optimal scenario for gold."

Market participants are now awaiting speeches from Dallas Federal Reserve President Lori Logan and Vice Chair Philip Jefferson, scheduled for later today.

In other precious metals markets, spot silver fell 1.7% to $56.82 per ounce, platinum declined 1.2% to $1,654.38, and palladium dropped 1.5% to $1,294.43.

Precious metals analysts at Investing Dot Com said gold prices continued their losses on Thursday, as investors ignored weak US inflation data and instead focused on inflation risks from rising oil prices, reinforcing expectations that the Fed will remain cautious on interest rates.

US producer prices unexpectedly fell 0.3% in June, compared with expectations of no monthly change, following low consumer inflation data earlier this week. The consecutive reports reinforced signs of easing core price pressures and reduced expectations of an imminent interest rate hike by the Fed.

However, investors largely ignored the previous inflation data, as renewed clashes in the Middle East pushed crude oil prices up for a fourth consecutive session. The latest escalation revived fears that rising energy costs could drive inflation higher in the future, potentially limiting the Fed's ability to ease monetary policy despite the recent retreat in price pressures.

This uncertainty kept pressure on gold. While lower inflation would typically weaken the dollar and support gold by reducing rate hike expectations, renewed gains in oil prices raised doubts about the sustainability of the recent disinflation trend.

Federal Reserve Chairman Kevin Warsh affirmed this week policymakers' commitment to returning inflation to the central bank's 2% target, emphasizing their readiness to adjust interest rates if price pressures persist. He also downplayed concerns that heavy investment in artificial intelligence could, by itself, exacerbate inflation.

In related news, Federal Reserve Governor Lisa Cook said she would support taking further policy action if inflation remains high, while New York Fed President John Williams said current interest rates are "in a good place" to bring inflation back to target, stressing that officials remain cautious despite the recent retreat in price data.