Gold declines as rising energy-driven inflation fears boost rate hike expectations

Gold prices fell by more than 1% on Tuesday as bets on additional US interest rate hikes this year increased after US military strikes on Iran reduced hopes for a peace agreement, pushing oil prices higher and bringing inflation concerns back into focus.

Spot gold fell 1% to $4,526.86 per ounce, while US June gold futures rose 0.1% to $4,527.90 per ounce.

Jim Wyckoff, market analyst at American Gold Exchange, said: “Bond markets believe the Federal Reserve’s next move will be an interest rate hike, and that is a negative factor for the gold market today.”

Kevin Warsh was sworn in as chairman of the Federal Reserve on Friday, taking over leadership of the US central bank amid growing expectations of tighter global monetary policy.

Markets are currently pricing in a 25 basis point US interest rate hike in December. Although gold is considered a hedge against inflation, the non-yielding precious metal struggles in a high interest rate environment.

In another sign of mounting inflation concerns, Brent crude prices rose by more than 3% on Tuesday as uncertainty persisted over the possibility of a peace agreement between the United States and Iran that would allow shipping through the Strait of Hormuz to reopen.

Higher oil prices increase inflationary pressures as manufacturers pass rising costs on to consumers.

Wyckoff added: “Short-term technical indicators still favor sellers, which is also triggering some technical selling activity.”

He noted that markets will closely monitor US personal consumption expenditures price index data for April, due on Thursday, as a key indicator for measuring inflation pressures and determining the future direction of US monetary policy.

In the same context, UBS lowered its year-end gold price forecast by $400 to $5,500 per ounce due to continued risks related to higher yields and a stronger US dollar.

As for other precious metals, spot silver fell 2.1% to $76.43 per ounce, platinum declined 0.9% to $1,950.71, while palladium slipped 0.2% to $1,396.26 per ounce.