Gold falls as Iran conflict pushes oil above $100, Fed rate hike bets firm

Gold slips as oil spike and rate hike bets collide

Gold prices fell on Thursday, extending losses as escalating conflict in Iran pushed Brent crude above $100 a barrel for the first time in months. The surge in oil prices stoked fresh inflation fears, reinforcing market expectations that the Federal Reserve will keep raising interest rates. Spot gold traded lower, pulling back from a two-week peak touched earlier in the week.

Analysts pointed to a double whammy for the yellow metal. Higher oil prices increase input costs across the economy, which central banks typically counter with tighter monetary policy. At the same time, rising bond yields and a firmer dollar made gold less attractive to investors holding other currencies.

Oil above $100 revives inflation jitters

Brent crude breached the $100 mark during Asian trading hours, a level not seen since the Russia-Ukraine crisis. The move followed reports of military escalation in the Iran conflict, raising concerns about supply disruptions from the region. Energy markets have been on edge for weeks as the situation deteriorated.

The oil rally added to persistent inflationary pressure. Traders now see a higher probability of the Fed raising rates at its next meeting in September. That prospect hit gold, which offers no yield and tends to lose appeal when borrowing costs climb. The metal had briefly rallied earlier this week on safe-haven buying, but that momentum faded as rate hike expectations hardened.

Fed meeting in focus, yields push higher

All eyes are now on the Federal Reserve's upcoming policy meeting. Markets are pricing in a 25-basis-point hike, with some analysts even floating the possibility of a larger move if inflation data remains sticky. The CME FedWatch Tool showed a sharp jump in rate hike bets after the oil price spike.

US Treasury yields rose across the curve, with the 10-year note climbing to its highest level in three weeks. Higher yields increase the opportunity cost of holding gold, which does not pay interest. The dollar index also gained ground, further denting demand for bullion priced in greenbacks.

Kitco's latest report noted that gold was under pressure from both the oil-driven inflation narrative and the hawkish Fed repricing. The metal had been hovering near $1,960 an ounce in early trade but slipped below that level as the session progressed.

What to watch

Gold traders will closely monitor developments in the Iran conflict and any fresh signals from Fed officials. If oil prices continue to climb, inflation expectations could rise further, forcing the Fed to maintain its hawkish stance. In that scenario, gold may struggle to regain recent highs. On the other hand, any de-escalation in the Middle East could ease pressure on the metal. The next few trading sessions are likely to be volatile as markets digest the dual shocks of war and monetary tightening.