Gold prices were little changed on Friday but remained on track for their biggest weekly decline in six weeks as rising geopolitical tensions in the Middle East lifted oil prices, stoked inflation concerns and strengthened expectations that the US Federal Reserve could keep interest rates higher for longer.
Spot gold was trading flat at $3,970.35 per ounce by 1332 GMT, hovering near its lowest level since July 1. The precious metal has fallen more than 3% this week, marking its steepest weekly decline in six weeks.
US gold futures for August delivery were down 0.5% at $3,973.10 per ounce.
Stronger Dollar, Higher Oil Prices Pressure Gold
Gold came under pressure as the US dollar extended gains for a second consecutive session, making dollar-denominated bullion more expensive for overseas buyers.
Chris Gaffney, president of World Markets at EverBank, said the recent selloff has largely been driven by a stronger US dollar and growing concerns that rising global inflation could push interest rates higher.
The latest move in gold comes amid an escalation in the conflict between the United States and Iran. The US intensified its bombing campaign by targeting bridges and an airport in Iran, while Tehran responded with strikes on US military bases across the Middle East.
The geopolitical tensions sent energy prices sharply higher, with Brent crude oil rising more than 14% this week.
Although gold is traditionally considered a hedge against inflation and geopolitical uncertainty, higher interest rates tend to reduce its appeal because the metal does not generate interest income.
Markets See Higher Probability of Fed Rate Hike
Rising oil prices have also fuelled concerns that inflation could remain elevated, prompting investors to reassess the outlook for US monetary policy.
According to the CME FedWatch Tool, traders are now pricing in a 53.3% probability of a US interest rate hike in September.
Federal Reserve Vice Chair Philip Jefferson said on Thursday that he would be open to raising interest rates if inflation does not show meaningful improvement in the near term.
Gaffney noted that while recent economic data had slightly reduced expectations of an immediate rate hike, rising global interest rates and higher energy costs could encourage the Federal Reserve to adopt a more hawkish stance in the coming months.
Gold Remains Under Pressure Despite Geopolitical Risks
Gold has declined around 25% since the US-backed conflict with Iran began in late February, as investors increasingly worry that war-driven inflation could force central banks to maintain tighter monetary policy for longer. However, Goldman Sachs believes the longer-term investment case for gold remains intact.
The investment bank said gold's share in private investment portfolios remains relatively low and recent geopolitical developments, including tensions involving Iran, could encourage greater diversification into the precious metal beyond central bank purchases.
Other Precious Metals Also Decline
The weakness extended across the precious metals market. Spot silver fell 0.8% to $55.05 per ounce, platinum declined 3.3% to $1,563.49, while palladium slipped 1.5% to $1,230.42. All three metals were also on track to post weekly losses.
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