Gold is on track for its largest weekly decline in six weeks, falling 3.2% so far this week, primarily driven by escalating US-Iran clashes that have pushed oil prices higher. This surge in oil prices, up 12% this week due to limited flows from the Strait of Hormuz, has reignited inflation worries and increased the likelihood of interest rate hikes by the Federal Reserve. Non-yielding gold typically struggles in a high-interest-rate environment as investors move towards assets with better returns.
Spot gold was trading around $3,988.20 per ounce by 0313 GMT, having touched its lowest point since July 1 earlier in the session. US gold futures for August delivery were steady at approximately $3,992. The metal's decline has occurred despite softer US inflation figures released on July 14, with analysts like Tim Waterer of KCM Trade noting that the oil price spike overshadowed the cooler inflation numbers. Gold is now roughly 26% below its January peak of nearly $5,600 an ounce, marking one of its steepest drawdowns since 1960.
Traders are currently pricing in a 73% chance of a Federal Reserve interest rate hike in December, according to the CME FedWatch Tool. Several Fed officials have expressed concerns about inflation; Dallas Federal Reserve president Lorie Logan publicly called for a rate hike, and Fed vice-chair Philip Jefferson indicated openness to raising rates if inflation does not improve. Morgan Stanley analysts suggest gold prices could move higher, but this is contingent on the Fed refraining from additional rate hikes. Ryan McKay, senior commodity strategist at TD Securities, noted that precious metals have come under selling pressure as oil prices move back into the $80s/bbl range, with TD's model showing potential for further selling if prices hit around $3,790.
