Gold prices are on track for their largest weekly decline since early June, primarily due to rising inflation concerns linked to escalating tensions between the U.S. and Iran. As of Friday, spot gold was up 1% at $4,011.29 per ounce, but it has fallen approximately 2.6% for the week. U.S. gold futures for August delivery settled 0.7% higher at $4,018.80.
Key Details
The recent surge in oil prices, driven by increased military actions in the Middle East, has exacerbated inflation fears. Brent crude oil prices rose around 16% for the week following U.S. airstrikes on Iranian targets, which prompted retaliatory strikes from Tehran on U.S. bases. Chris Gaffney, president of world markets at EverBank, noted that the stronger U.S. dollar and higher inflation expectations have contributed to the selloff in gold.
Background
Despite a slight recovery on Friday, gold has dropped about 25% since the onset of the U.S.-backed conflict with Iran in late February. Higher interest rates typically weigh on non-yielding assets like gold, and market participants are increasingly concerned that elevated oil prices could prompt the Federal Reserve to adopt a more hawkish stance on interest rates. Traders currently see a 58% chance of a rate hike in September, according to the CME FedWatch Tool.
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The rising oil prices are likely to influence inflation expectations, which could lead to higher interest rates. This environment typically pressures gold prices, making it less attractive to investors. The energy sector may also see increased volatility as geopolitical tensions continue to unfold.
Investors will watch for the upcoming Federal Open Market Committee (FOMC) meeting in September, where interest rate decisions will be closely scrutinized.