Gold set for biggest weekly drop since early June on inflation, rate-hike worries

Gold rose on Friday butwas on track for its biggest weekly loss in six as escalating U.S.-Iran tensions drove energy prices higher, fuelling inflation fears and reinforcing expectations of U.S. interest rate hikes. Spot gold was ‌up 1% at $4,011.29 ⁠per ⁠ounce by 2:20 p.m. EDT (1820 GMT). Prices touched their lowest level since June 30 earlier in the session and were down around 2.6% so far for the week. U.S. gold futures for August delivery settled 0.7% higher at $4,018.80.

The U.S. dollar rose for a second straight session, making bullion more expensive for overseas buyers. “The main drivers of the selloff in gold have been a stronger U.S. dollar and higher global inflation fears, which have sent global interest ⁠rates higher,” ‌said Chris Gaffney, president of world markets at EverBank. The U.S.escalated its renewed bombing campaign on Iran, hitting bridges and an airport. Tehran responded with strikes ⁠on U.S. bases across the Middle East. Brent crude oil prices were up around 16% for the week following the attacks.

Bullion has fallen about 25% since the U.S.-backed war with Iran began in late February, pressured by expectations that war-driven inflation could keep interest rates higher for longer.

While gold is seen as a hedge against inflation, higher rates typically weigh on the non-yielding metal. “Recent data have decreased the probability of a rate hike at the next FOMC meeting, but global interest rates ‌continue to climb and the recent increase in oil prices could drive the Federal Reserve to take a more hawkish stance on U.S. interest rate policy,” Gaffney said. Traders see about a ⁠58% chance of a U.S. interest rate hike in September, according to the CME FedWatch Tool. On Thursday, Fed Vice Chair Philip Jefferson suggested he would be open to raising rates if there was no near-term improvement in inflation.

However, “gold’s share in private portfolios remains low, and recent geopolitical developments, including Iran and broader tensions, may accelerate diversification beyond central banks to private investors,” Goldman Sachs said in a note. Spot silver rose 1% to $56.06, platinum dropped 1.4% to $1,595.64, and palladium was steady at $1,249.63. All three metals were headed for weekly losses.