Gold Heads for Steepest Weekly Drop in Six Weeks as Iran War Fans Inflation, Rate Hike Fears

Gold prices pared losses on Friday but remained on course for their steepest weekly decline in six weeks, as renewed hostilities between the United States and Iran pushed oil prices sharply higher and strengthened bets that the Federal Reserve will need to keep interest rates elevated.

Spot gold was up about 1% at $4,011.29 per ounce by late trade, after touching its lowest level since July 1 earlier in the session. The metal was down more than 3% for the week, according to multiple reports. U.S. gold futures for August delivery settled 0.7% higher at $4,018.80.

The selloff has been driven by a stronger U.S. dollar and growing fears that rising global inflation will push interest rates higher, said Chris Gaffney, president of World Markets at EverBank. The dollar rose for a second straight session, making bullion more expensive for overseas buyers.

Iran Escalation Fuels Oil Spike

The United States intensified its bombing campaign against Iran, targeting bridges and an airport, while Tehran responded with strikes on U.S. military bases across the Middle East. The week-long escalation has largely unraveled last month’s truce, one report noted.

Brent crude oil prices jumped between roughly 12% and 16% for the week on supply disruption fears. Higher energy costs are kindling inflation concerns that could force central banks to maintain tighter monetary policy.

Rate Hike Expectations Build

Traders currently see about a 53% to 58% probability of a U.S. interest rate hike in September, based on the CME FedWatch Tool. Swap traders, meanwhile, price in just a 12% chance of a move at the Fed’s July meeting but see at least one increase by the end of the year.

Dallas Federal Reserve President Lorie Logan became the first of Fed Chairman Kevin Warsh’s new colleagues to publicly call for a rate hike, according to one report. Fed Vice Chair Philip Jefferson also suggested he would be open to raising rates if inflation does not show meaningful improvement in the near term. Kansas City Fed President Jeff Schmid noted that inflation remains persistent across a broad range of goods and services.

Gaffney said that while recent data had slightly reduced expectations of an immediate rate hike, rising global interest rates and higher energy costs could encourage the Fed to adopt a more hawkish stance in the coming months.

Gold’s Longer-Term Picture

Bullion has fallen about 25% since the U.S.-backed conflict with Iran began in late February, as war-driven inflation concerns weigh on the non-yielding metal. Although gold is traditionally seen as a hedge against geopolitical uncertainty and inflation, higher interest rates reduce its appeal because it offers no income.

Some dip buying emerged when the metal broke below the key $4,000 level, said Ryan McKay, senior commodity strategist at TD Securities. “It should be expected that there is some softening in the inflation numbers as energy prices tanked in June, but more recent escalations will be keeping a lid on things and keeping Fed hike odds alive.”

U.S. consumer sentiment rose to a five-month high in early July, with consumers expecting prices to rise at an annual rate of 4.2%, down from 4.6% in June, one report showed.

Bullion had hovered in a narrow range around $4,000 an ounce in recent weeks after losing 14% in the second quarter—its worst showing since 2013. It notched its worst monthly performance since the 2008 financial crisis in June.

Goldman Sachs said in a note that gold’s share in private portfolios remains low, and recent geopolitical developments, including tensions with Iran, may encourage greater diversification into the precious metal beyond central bank purchases.

Other Precious Metals

The weakness extended across the precious metals complex. Spot silver rose about 1% to $56.06, platinum dropped 1.4% to $1,595.64, and palladium was steady at $1,249.63. All three metals were headed for weekly losses.