Gold hits two-week low: are rising oil prices to blame?

Gold fell to a two-week low on Friday as oil prices pushed back above $100 a barrel after renewed military tension between the US and Iran heightened inflation concerns and reinforced expectations that interest rates may stay higher for longer.

Spot gold was down 0.7% at $4,705.09 an ounce, while US gold futures for June delivery slipped 0.6% to $4,705.10.

The metal also came under pressure from a firmer dollar, which posted its biggest gain in more than a week after strong US business data, making bullion more expensive for buyers using other currencies.

Oil and conflict pressure sentiment

Risk sentiment remained fragile after Iran attacked US and allied military installations in Iraq, deepening fears that conflict in the region could drag on even as both Washington and Tehran continued to say they did not want a wider war.

The US military said Iranian troops had fired on US forces in Iraq and that a US aircraft had made an emergency landing.

The confrontation came on top of growing disruption across regional shipping lanes.

Iran has seized multiple vessels in recent months, including two ships in the Strait of Hormuz, while a US maritime oil embargo on Tehran has remained in place, according to US and Iranian sources.

Brent crude rose above $100 a barrel again, supported by sharply lower US gasoline and distillate inventories and by concerns that failed truces in the region could keep supply risks elevated.

Higher oil prices have complicated the outlook for precious metals by reviving inflation fears at a time when investors had been hoping for easier monetary policy later this year.

Higher-for-longer rates weigh on bullion

Gold, which typically benefits from geopolitical stress, struggled to attract sustained demand because rising energy prices also strengthened the case for the Federal Reserve to keep borrowing costs elevated.

Higher rates reduce the appeal of non-yielding assets such as bullion.

The analysts said oil’s move back into triple digits was likely to keep inflation at the centre of investor thinking and trigger selling into any rallies in gold.

They added that what had once appeared to be a short-lived conflict now looked more likely to drag on for months, undermining bullion from a yield perspective.

A Reuters poll found the Federal Reserve may have to wait at least six months before cutting rates, as war-driven energy price increases feed into inflation.

Interest-rate futures also moved to reflect a more hawkish outlook, implying only a 23% chance of a rate cut in December, down from 28% a week earlier.

Before the latest conflict escalation, traders had been pricing in two cuts this year.

Dollar strength adds to pressure

The dollar’s advance added another layer of pressure to bullion, offsetting some of the metal’s safe-haven appeal as equity markets weakened.

Investors appeared to favour the US currency and short-dated yields over gold as a more immediate hedge against geopolitical and inflation risks.

Other precious metals also declined.

Spot silver fell 1.4% to $76.64 an ounce, platinum slid 1.3% to $2,048.25, and palladium dropped 1% to $1,529.25.

For now, bullion remains caught between two opposing forces: demand for safety as geopolitical tensions intensify, and pressure from a stronger dollar, higher oil prices and fading hopes of near-term Fed easing.