Gold Heads for Biggest Weekly Loss in Six as Iran Hostilities Fuel Fed Rate Hike Bets

Gold prices edged higher on Friday but were still set for their largest weekly loss in six weeks, as a sharp escalation in U.S.-Iran hostilities lifted oil prices, reignited inflation fears, and strengthened the case for the Federal Reserve to keep rates higher or even raise them further.

Spot gold gained 0.5% to $3,988.57 per ounce by 0103 GMT, after touching its lowest since July 1 earlier in the session, according to a report from indiatimes.com. U.S. gold futures for August delivery were steady at $3,992.70. For the week, the metal is down over 3%.

The decline has been driven by a renewed bout of conflict between Iran and the United States. The two countries exchanged intensifying fire on Thursday in a week-long escalation that has largely unraveled last month's truce, indiatimes.com reported. Oil prices have jumped about 12% this week as the conflict stoked supply concerns. The rise in crude has heightened fears of persistent inflation, a development that typically weighs on non-yielding gold because higher interest rates make yield-bearing assets more attractive.

Several Federal Reserve officials have signaled a willingness to tighten policy further. Dallas Federal Reserve President Lorie Logan became the first of Fed Chairman Kevin Warsh's new colleagues to call publicly for a rate hike, according to indiatimes.com. Fed Vice Chair Philip Jefferson also suggested he would be open to raising rates if there is no near-term improvement in inflation. Kansas City Fed President Jeff Schmid said inflation is proving persistent across a broad range of goods and services and remains the focus of monetary policy given a stable labor market.

The market anticipates the Fed could lift its policy rates at its September meeting, according to Thailand's leading gold trader MTS Gold, as reported by the Bangkok Post. Kritcharat Hirunyasiri, chairman of MTS Gold, warned that gold faces downside risks for one to two months from oil-driven inflation and potential Fed tightening. "The biggest risk to gold prices is a sustained rise in oil prices," he said. "If crude oil climbs above $90-100 per barrel and remains elevated, inflation could accelerate again in the US, potentially prompting the Fed to keep interest rates higher for longer or even raise rates further."

Kritcharat projected that if U.S. rates are lifted, gold prices could fall to $3,800 an ounce or even $3,600 as a bottom. He noted that a sustained rise in oil to $90-100 a barrel for more than a month could push gold to $3,600-3,800 per ounce, or 60,000 baht per baht-weight for domestic gold bars in Thailand.

Year-to-date, bullion has lost more than 6.8% to stand at $4,030 an ounce, though it has recovered from a low of $3,950 earlier in the year. The metal reached an all-time high of $5,602.22 an ounce on January 28 this year.

A commodity strategist quoted by mining.com said, "Precious metals have come under selling pressure as oil prices move back into the $80s/bbl range."

The weekly loss is the biggest since early June, according to a Bloomberg report, which noted that renewed hostilities in the Middle East have raised the odds that the Fed may need to raise interest rates to contain inflation.

Despite the near-term headwinds, the medium- and long-term outlook for gold remains positive, according to Kritcharat. Analysts cited by the Bangkok Post forecast gold to finish the year in a range of $4,500-5,000 per ounce, downgraded from earlier year-end projections above $5,000. Longer term, if prices hold at the $4,000 level over the coming months, analysts believe gold could eventually climb to $6,000-8,000 per ounce, supported by continued central bank purchases and the de-dollarisation trend.

In other metals markets, spot silver gained 0.2% to $55.60 per ounce, platinum eased 0.1% to $1,616.10, and palladium rose 0.4% to $1,254.62. All three were headed for a weekly loss, according to indiatimes.com.

Separately, MTS Gold is launching Thailand's first investment digital token providing exposure to the gold bullion trading business, the Bangkok Post reported. The token offers a three-year term with a fixed return of 3% per year and additional returns linked to gold price appreciation. Subscription runs from July 24 to August 31.