Gold and silver prices fell after the United States and Iran exchanged fresh blows over the weekend, pushing up energy prices and raising again the prospect of an interest rate hike to combat inflation.
The spot price of gold fell by as much as 1.6% to approach $4,050 an ounce, after losing 1.4% of its value during the past week.
Confusion reigned regarding the status of energy shipments through the Strait of Hormuz, as the United States denied an earlier Iranian statement that the waterway would be closed until further notice. US Central Command said that US forces had launched a fourth round of strikes in a week in response to an attack by Tehran on a Cypriot-flagged container ship.
For gold traders, the escalating fighting in the Middle East raises concerns that the Federal Reserve will have to keep interest rates high for longer to combat stubborn inflation.
Minutes from the Federal Reserve's June meeting, released last week, showed that few policymakers saw a justification for raising interest rates, although they ultimately supported the decision to keep them unchanged.
Overall, the minutes reflected growing concern among US Federal Reserve officials about inflation, while worries about the labor market eased slightly. High borrowing costs are typically a disadvantage for gold, which does not yield interest.
Hebei Chen, an analyst at Vantage Markets in Melbourne, said that renewed geopolitical tensions sent another shockwave through an already fragile gold market. She added: “Unless the fighting around the Strait of Hormuz subsides significantly and opens a new chapter for precious metals, higher oil prices, stronger yields, and a stronger dollar could keep gold under pressure this week.”
Bullish bets decline ahead of Warsh's testimony
Gold has fallen by more than a fifth since the start of the Iran war in late February, as a wave of profit-taking ended a three-year rally and briefly pushed the metal below $4,000 for the first time since November. However, there is little evidence yet that investors are building large-scale short positions in anticipation of further declines.
The latest pressure on gold comes as Kevin Warsh prepares to make his first appearance before Congress as Federal Reserve chairman on Tuesday. The hearing before the House Financial Services Committee in Washington will be preceded by the release of June consumer price data from the Bureau of Labor Statistics.
Spot gold fell 1.5% to $4,058.18 an ounce at 11:34 a.m. in Singapore. Silver dropped 2.9% to $58.11 an ounce. Platinum and palladium also declined. The Bloomberg Dollar Index, a measure of the U.S. currency, rose 0.2%.
