Gold falls as Iran strikes lift oil and fuel higher-rate fears

Gold prices fell on Tuesday as a jump in oil prices after US strikes in Iran complicated the metal’s traditional role as an inflation hedge and revived concerns that interest rates may stay higher for longer.

Spot gold declined 0.7% to $4,537.54 an ounce as of 0218 GMT. US gold futures for June delivery rose 0.3% to $4,538.50 an ounce.

The move came as Brent crude futures climbed 2% in early Asian trading after US forces struck targets in southern Iran, including boats that were reportedly attempting to lay mines and missile launch sites.

Washington described the strikes as defensive.

Oil shock unsettles bullion market

Higher oil prices typically feed inflation expectations, a backdrop that can support demand for gold as a store of value.

This time, however, the market reaction was more complicated.

Investors focused on the possibility that a sustained rise in energy costs could force the US Federal Reserve to keep monetary policy tighter for longer, or even raise rates again before the end of the year.

That is a negative for gold, which pays no interest.

When bond yields and interest rates rise, the opportunity cost of holding bullion increases, often reducing its appeal relative to income-generating assets.

Kelvin Wong, senior market analyst at OANDA told Reuters that even if a peace deal between the US and Iran was close, damage to Middle East oil infrastructure could delay the normalisation of crude flows from the region.

“The market has started to price in this situation, showing very high odds of an interest rate hike to come in this year,” Wong said.

Fed bets add pressure

The Fed held interest rates last month and has signalled that another increase remains possible before year-end. Markets are pricing in a 56% chance of a rate hike by December, according to CME Group’s FedWatch tool.

That shift has left gold caught between two opposing forces.

On one side, geopolitical risk and inflation concerns could support safe-haven demand. On the other, higher rates and a firmer dollar make bullion less attractive.

Gold had already come under pressure earlier on Tuesday as the dollar strengthened on speculation that the US and Iran could reach a peace agreement.

A stronger dollar tends to weigh on commodities priced in the currency by making them more expensive for buyers using other currencies.

The dollar gained 0.34% against gold in the previous session, its biggest daily increase in two weeks, as investors bet on a possible deal to end the conflict, the report said.

Other metals decline

Weakness spread across the precious metals complex.

Spot silver dropped 1.8% to $76.66 an ounce, while platinum fell 0.9% to $1,950.70. Palladium declined 1.1% to $1,382.42.

The broader move suggested traders were not treating the Iran tensions as a straightforward safe-haven event.

Instead, markets appeared more focused on the inflationary impact of higher energy prices and the policy response that could follow.

Talks in focus

Investors are now watching diplomatic efforts around the Iran-US conflict.

Iran’s top negotiator and foreign minister were in Doha on Monday for talks with Qatar’s prime minister on a potential deal with Washington to end the three-month-old war.

Both sides have played down the chances of an imminent breakthrough.

Even so, the talks are being closely watched because any progress could ease pressure on oil markets and, in turn, reduce some of the inflation concerns weighing on gold.

For now, bullion remains caught between safe-haven demand and rate-hike risk, with energy prices likely to remain the key driver for the next move.