Gold prices fell significantly on Monday, with spot gold dropping 1.5% to $4,060.36 per ounce by 0541 GMT and US gold futures for August delivery declining 1.1% to $4,068.30. The decline was largely attributed to fears of a closure of the Strait of Hormuz following exchanges of heavy missile and drone assaults between US and Iranian forces, which caused oil prices to surge about 4%. This surge in oil stoked expectations of elevated interest rates from the Federal Reserve to combat potential inflationary pressures.
Market sentiment indicates a growing belief in a September interest rate hike by the US Fed, with the CME FedWatch Tool showing a 72% chance, up from 63% last week. Remarks from Fed policymakers, including Vice Chair Michelle Bowman and Governor Christopher Waller, were also closely watched, with Waller flagging the possibility of a rate hike if core inflation continues to climb. The two-year Treasury yield climbed to its highest since February 2025, and the dollar strengthened, making gold more expensive for many buyers.
Analysts are bearish on gold in the short term, with Fawad Razaqzada from Forex.com suggesting prices could fall to $3,800 or even $3,500 if selling pressure accelerates and oil prices remain high. The drop below $4,000 per ounce was approximately 3.09% for spot gold, losing about $128 from Friday's close. This week, investors are focused on Federal Reserve Chair Kevin Warsh's first semiannual testimony before Congress, and key US economic data, including June CPI, PPI, and retail sales, which could offer further clues on inflation and monetary policy.
The usual safe-haven appeal of gold during conflicts has been overshadowed by the inflation concerns stemming from rising oil prices. Higher oil costs contribute to increased transportation and production expenses, which in turn strengthen expectations for higher interest rates. This dynamic, coupled with a stronger dollar, makes non-yielding assets like gold less attractive to investors. If the geopolitical tensions ease or oil prices drop, gold could regain its appeal, but currently, it is acting more as a rate-sensitive investment.
