Gold heads for biggest weekly fall in six weeks as oil surge revives inflation concerns

Gold was set for its largest weekly decline in six weeks on Friday as escalating fighting between the United States and Iran pushed oil prices higher, renewing inflation concerns and increasing expectations of further US interest rate hikes.

Spot gold rose 0.5% to $3,988.20 per ounce by 0313 GMT after touching its lowest level since July 1 earlier in the session. US gold futures for August delivery were little changed at $3,992.

Despite Friday’s recovery, bullion was down 3.2% for the week, marking its steepest weekly fall since June 1.

The decline came even after softer US consumer and producer inflation figures for June. Analysts said the impact of the data was offset by a sharp rise in oil prices linked to the renewed Middle East conflict.

“Even with tamer CPI and PPI figures, the oil price spike this week meant traders simply couldn't celebrate the cooler inflation numbers,” said Tim Waterer, chief market analyst at KCM Trade.

He said geopolitical risks remained elevated, while concerns over inflation and bond yields continued to weigh on gold.

The United States and Iran exchanged intensified attacks on Thursday during a week-long escalation that has largely undone last month’s truce.

Oil prices have risen about 12% this week as flows through the Strait of Hormuz remained restricted and Tehran asked the Houthi movement to prepare to close the Red Sea export route.

Higher oil prices could add to inflationary pressures and strengthen the case for tighter US monetary policy. Gold, which does not pay interest, generally faces pressure when rates and bond yields rise.

Dallas Federal Reserve President Lorie Logan became the first among Federal Reserve Chairman Kevin Warsh’s new colleagues to publicly support an interest rate increase.

Federal Reserve Vice Chair Philip Jefferson also said he could back a rate hike if inflation does not improve in the near term.

Traders are currently pricing in a 73% probability of a rate increase in December, according to the CME FedWatch Tool.

Among other precious metals, spot silver fell 0.5% to $55.22 per ounce, platinum declined 0.7% to $1,605.62 and palladium slipped 0.4% to $1,244.86. All three were heading for weekly losses.