The surge in oil prices risks reigniting inflation worries and increasing the likelihood of interest rate hikes.
Gold was on track for its biggest weekly loss in six on Friday, as escalating U.S.-Iran clashes lifted oil prices, adding to inflationary pressures and strengthening the case for higher U.S. interest rates. Spot gold was up 0.3% at $3,980.64 per ounce by 0455 GMT, having touched its lowest since July 1 earlier in the session. U.S. gold futures for August delivery lost 0.2% at $3,984.10. The metal, however, has lost 3.4% so far this week, its largest decline since June 1, with the ongoing Middle East tensions outweighing support from softer June U.S. inflation figures released this week.
“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.
“Geopolitical risks in the Middle East are still present, with inflation and yield concerns being the dominant forces holding gold back.” Iran and the United States exchanged intensifying fire on Thursday in a week-long escalation that has largely unravelled last month’s truce. Oil prices have jumped about 12% so far this week due to limited oil flows out of the Strait of Hormuz, with Tehran asking the Houthi movement to stand ready to shut the Red Sea export route.
The surge in oil prices risks reigniting inflation worries and increasing the likelihood of interest rate hikes. Non-yielding gold typically struggles in a high-interest-rate environment, as investors gravitate toward assets offering higher returns. Dallas Federal Reserve President Lorie Logan became the first of Fed Chairman Kevin Warsh’s new colleagues to call publicly for a rate hike. Fed Vice Chair Philip Jefferson also suggested he would be open to raising rates if there is no near-term improvement in inflation.
Traders are currently pricing a 73% chance of an interest rate hike in December, according to the CME FedWatch Tool. Elsewhere, spot silver fell 0.6% to $55.20 per ounce, platinum lost 1.1% to $1,599.17, and palladium eased 0.4% to $1,244.16. All three metals were headed for a weekly loss.
