Gold trades lower despite geopolitical risks as higher yields cap gains

Gold prices traded slightly lower on Monday ahead of the North American market open as renewed tensions between the United States and Iran boosted crude oil prices and reinforced expectations that the Federal Reserve could keep interest rates elevated for longer.

At the time of writing, spot gold was trading near $4,012.00 an ounce, down 0.13% on the session.

Earlier in the day, spot bullion slipped around 0.1% to approximately $4,015 an ounce during early Asian trading, while August gold futures held near $4,020.

Gold remains under pressure despite geopolitical support

Gold traded within an early session range of $3,982.20 to $4,040.90, leaving the precious metal below the $4,023.35 to $4,065.83 retracement zone after another unsuccessful attempt to move above $4,040.

Silver traded between $55.40 and $57.60, rebounding from last week's lows.

However, it remained below the $58.53 to $59.44 trader-reaction zone that capped the latest downside move.

The muted performance in gold reflected an unusual market dynamic.

While intensifying US-Iran hostilities continued to support demand for defensive assets, the resulting rally in crude oil also strengthened inflation expectations.

Economic data temper expectations for Fed policy shift

Market positioning following the latest US economic data has remained less dovish than earlier inflation readings had suggested.

Softer June consumer and producer inflation data initially eased pressure for another near-term Federal Reserve policy move.

However, stronger retail sales, lower weekly jobless claims, a sharp rebound in the Philadelphia Fed manufacturing index, and firmer University of Michigan consumer sentiment have kept traders from fully pricing in a shift toward easier monetary policy.

Markets continue to view the Federal Reserve's July 29 meeting as likely resulting in no change to interest rates.

However, at least one additional rate hike later this year remains priced into market expectations as energy prices continue to rise.

The benchmark 10-year US Treasury yield traded near 4.57%, while the US Dollar Index (DXY) strengthened to around 100.87.

The combination of higher yields and a firmer dollar continued to cap gains in gold despite ongoing geopolitical uncertainty.

Strait of Hormuz tensions keep energy markets in focus

The situation around the Strait of Hormuz remained a major focus for financial markets.

Shipping activity through the strategic waterway has largely stalled amid ongoing military pressure.

The United States launched another round of strikes targeting Iranian military command centres, coastal surveillance sites, missile and drone launch sites, and maritime capabilities following the death of another American service member.

Iran subsequently retaliated against Bahrain and Kuwait.

As a result, Brent crude climbed back above $90 a barrel, increasing concerns about energy-driven inflation.

For gold, the impact remained mixed.

Escalating geopolitical tensions continued to support safe-haven demand, but rising oil prices reinforced inflation risks, pushed Treasury yields higher, and reduced demand for non-yielding bullion.

Traders are closely monitoring upcoming Federal Reserve communication, developments in expectations for a possible September rate hike, and any further disruption to shipping through the Strait of Hormuz.