Gold drops as Middle East escalation revives US rate-hike concerns

Gold prices fell on Thursday as renewed fighting between the United States and Iran pushed oil prices higher and raised concerns that inflation could remain elevated, reducing expectations of easier monetary policy.

Spot gold declined 0.9% to $4,024.60 per ounce by 0729 GMT, while US gold futures for August delivery fell 0.6% to $4,029.50.

The United States carried out two rounds of attacks on Iranian coastal defences and missile sites on Wednesday after restoring a naval blockade of Iranian ports. Iran responded by targeting US military installations in neighbouring countries.

Oil prices have climbed 11% this week, increasing concerns that higher energy costs could add to inflation and keep US interest rates elevated.

Although gold is generally viewed as protection against inflation, higher interest rates reduce its appeal because the metal does not generate income.

US consumer and producer inflation slowed in June, helped by lower energy costs. However, those figures were recorded before the latest escalation in the Middle East.

Markets continued to price in around a 73% probability of a Federal Reserve rate increase in December, according to the CME FedWatch Tool.

Federal Reserve Governor Lisa Cook said she was prepared to respond if inflation failed to slow, while Fed Chairman Kevin Warsh reiterated the central bank’s commitment to bringing price pressures under control.

Investors were awaiting comments from Dallas Fed President Lorie Logan and Fed Vice Chair Philip Jefferson later in the day.

Among other precious metals, spot silver fell 1.7% to $56.78 per ounce, platinum declined 1.3% to $1,652.50 and palladium dropped 1.4% to $1,296.29.