Gold pared its weekly decline as investors stepped in to buy the dip after the precious metal broke below a key price level, even as intensifying war tensions in the Middle East kept the prospect of interest rate hikes firmly on the table. Bullion advanced as much as 1.2%, climbing back above the psychologically significant $4,000-an-ounce mark after earlier swinging between gains and losses. Despite the recovery, prices remained on track for a weekly decline of more than 2%.
The US and Iran clashed for a sixth straight day, with oil headed for a weekly rally on the back of disruptions to energy shipments. Hostilities escalated sharply over the weekend, including an attack on a vital oil facility in Kuwait and the targeting of ships attempting to transit through the Strait of Hormuz. Tehran declared that the ceasefire between the two nations has been effectively abandoned, raising the possibility of deepening disruptions to crucial energy flows through the narrow waterway.
The situation continued to deteriorate as US forces launched a fresh round of strikes on Iranian targets, and President Donald Trump vowed that Tehran "will pay" for killing three US soldiers in recent days. The conflict, now in its fifth month, is again driving up energy and commodity prices from fuel to raw materials used in manufacturing and food production. That's kindling fears the Federal Reserve may eventually be forced to tighten monetary policy, even as soft US economic data suggest a rate hike isn't likely in the near term. Higher borrowing costs are a headwind for non-yielding bullion.
"There was some dip buying on breaks of $4,000/oz," said Ryan McKay, senior commodity strategist at TD Securities. "It should be expected that there is some softening in the inflation numbers as energy prices tanked in June, but more recent escalations will be keeping a lid on things and keeping Fed hike odds alive." Some economic indicators offered a measure of relief. US consumer sentiment rose in early July to a five-month high as lower gasoline prices boosted morale, with consumers expecting costs to rise at an annual rate of 4.2% over the next year, down from 4.6% in June.
Still, a growing chorus of Fed officials is expressing concern over high inflation and warning that the central bank might soon need to lift rates. Bank of Cleveland President Beth Hammack joined those ranks in a LinkedIn post on Friday. Swap traders currently see just a 12% likelihood that the Fed will raise interest rates at its next meeting in July but have priced in at least one hike by the end of the year.
Bullion has hovered around $4,000 an ounce in recent weeks after losing 14% in the second quarter—its worst quarterly showing since 2013. June marked the metal's worst monthly performance since the 2008 financial crisis. Even so, speculative interest remains elevated. The latest government data showed hedge funds increased their bullish bets on Comex gold to the highest level in more than five months in the week ending July 14.
Spot gold was up 0.8% at $4,009.50 an ounce at 4:34 p.m. in New York, after trading as low as $3,992.91 earlier in the session in Asia. Silver rose 0.7% to $55.90 an ounce. Platinum fell while palladium edged higher. The Bloomberg Dollar Spot Index, a gauge of the US currency, was 0.06% higher. With the conflict showing no signs of abating, traders will continue to monitor developments in the Middle East for clues on how energy prices will feed through to inflation and, ultimately, whether the Fed will be forced to act.
