Gold experienced a decline as renewed hostilities between the US and Iran over the weekend led to an increase in energy prices, consequently raising the likelihood of interest-rate hikes aimed at controlling inflation. Bullion dropped by as much as 1.2% to under $4,070 an ounce on Monday, following a 1.4% decrease the previous week. Conflicting reports emerged regarding the status of energy transit through the Strait of Hormuz, with the US refuting Iran's earlier claim that the waterway would be closed "until further notice." US Central Command confirmed that American forces initiated attacks to ensure freedom of navigation in the strait.
Before these renewed tensions, money markets had anticipated at least 35 basis points of Fed tightening by year-end, which was halved to just 22 basis points after the Consumer Price Index (CPI) data release. However, the ongoing escalation in the Middle East has driven up energy prices, offsetting the effect of recent US inflation reports that showed a dip in prices. For instance, the Producer Price Index (PPI) decreased from 6% to 5.5% year-over-year, below estimates of 6.2%, while core PPI rose from 4.6% to 4.7% year-over-year, also below forecasts of 5.2%.
Despite the softer US inflation data, the geopolitical tensions continue to influence gold prices. The US launched new airstrikes against Iran, targeting coastal defense systems and missile infrastructure, and Iran retaliated with drone and missile attacks on US-linked military facilities. President Donald Trump warned of potential targeting of critical Iranian infrastructure if the situation worsens. This escalation, and the associated rise in crude oil prices, maintains the possibility of a Federal Reserve interest rate hike later in the year, which provides support to the US Dollar and diverts investment away from non-yielding bullion, consequently putting downward pressure on gold prices.
