Gold prices headed for their steepest weekly decline in six weeks on Friday as the escalating conflict between the United States and Iran drove oil prices higher, adding to inflationary pressures and strengthening expectations that US interest rates will continue to rise.

Spot gold gained 1.1% to $4,015.09 an ounce after earlier touching its lowest level since July 1.

US gold futures for August delivery rose 0.7% to settle at $4,018.80 an ounce.

Despite Friday’s rebound, the precious metal lost around 3% over the week, marking its biggest weekly decline since the week ended June 1.

The impact of the Middle East conflict outweighed support from weaker-than-expected US inflation data for June released earlier this week.

Rising oil prices strengthen rate expectations

Tim Waterer, Chief Market Analyst at KCM Trade, said gold had begun a cautious recovery after its fall below $4,000 attracted bargain buyers.

Geopolitical risks in the Middle East remained elevated, he said, but inflation concerns and higher bond yields continued to be the main factors limiting gold’s gains.

Oil prices rose around 12% over the week as the intensifying conflict between the United States and Iran fueled concerns over global supplies.

The increase threatens to revive inflation fears and raise the likelihood of further interest rate hikes, placing pressure on non-yielding gold as investors tend to favor assets offering higher returns when borrowing costs rise.

Fed officials strengthen tightening expectations

Dallas Federal Reserve President Lorie Logan became the first new official on Federal Reserve Chair Kevin Warsh’s team to publicly call for an interest rate increase.

Federal Reserve Vice Chair Philip Jefferson also indicated that he would be open to raising rates if inflation failed to show meaningful improvement in the near term.

According to the CME FedWatch Tool, markets are currently pricing in a 73% probability of an interest rate hike at the December meeting.

In physical markets, gold discounts in India widened to their highest level in a month as buyers held back in anticipation of further price declines, while premiums in China remained largely stable.

The results of Armenia’s parliamentary elections in June dealt a major blow to Russia’s efforts to reassert its influence over the South Caucasus, with implications extending well beyond Moscow, Washington, and Brussels.

For Beijing and Tokyo, which have quietly expanded their presence in the region as a land bridge connecting Asia and Europe, the election result reaffirming Prime Minister Nikol Pashinyan’s authority carries considerable geoeconomic importance.

Pashinyan’s decisive victory represented a clear popular rejection of rivals associated with the Kremlin and marked a significant failure of Moscow’s attempt to install a more sympathetic leadership in Yerevan.

It also amounted to a setback for Tehran, which has long been one of Armenia’s strongest supporters because of their shared hostility toward Azerbaijan. Azerbaijan’s largely secular Shia society is viewed as a direct counterpoint to the authoritarian Islamic model promoted by Tehran.

Iran and Russia are bound by defence and security agreements and a regional partnership built largely around resisting Western and Turkish influence, an approach Armenian voters rejected in the election.

With Russia severely weakened by the war in Ukraine and Iran preoccupied with its continuing confrontation with the United States and Israel, the two traditional powers of the South Caucasus are more constrained than at any point in recent decades.

That vacuum is particularly important for Asian economies that have spent the past several years searching for trade routes that do not pass through Russian or Iranian territory.

The Middle Corridor dilemma

Since 2022, China has intensified diplomatic and commercial efforts to support the Middle Corridor, the trans-Caspian route linking China with Europe through Central Asia, the Caspian Sea, the South Caucasus, and Turkey, while deliberately bypassing sanctioned Russian rail networks.

Beijing views the corridor as a safeguard for the Belt and Road Initiative, ensuring that goods can continue flowing westward even if Russia remains under sanctions. It could also serve as a long-term strategic lifeline in the event of a broader confrontation with the West.

Georgia and Azerbaijan have long been central to this plan. Armenia, historically peripheral to such calculations, is becoming increasingly important as Georgia moves closer to Russia.

Notably, a Chinese company recently withdrew from a project to develop a deep-water port at Anaklia on Georgia’s Black Sea coast.

A lasting peace between Armenia and Azerbaijan based on the Trump Route for International Peace and Prosperity would create new options for transporting goods across Armenian territory and strengthen the stability of the wider corridor on which Chinese logistics companies and state planners increasingly depend.

Such an arrangement, however, would largely be shaped by Washington rather than Beijing, a formula China is unlikely to welcome despite benefiting from the added stability.

Beijing is therefore expected to continue making discreet infrastructure investments across Central Asia and the Caucasus to preserve its influence over the corridor’s future, while allowing Washington to bear the diplomatic cost of mediating peace.

For Japan, the objective is less about competing with the Belt and Road Initiative and more about diversifying supply chains.

Tokyo has worked in recent years to deepen ties with Central Asian countries through the Central Asia plus Japan framework, seeking to reduce dependence on China-dominated trade routes and diversify access to critical minerals and energy resources.

A more stable South Caucasus, with a lower risk of renewed conflict between Armenia and Azerbaijan and fewer opportunities for Russian or Iranian disruption, would make the land bridge to Europe and the Gulf more attractive to Japanese trading companies and manufacturers seeking to reduce their exposure to Russian and Chinese corridors.

Iran’s declining position makes this shift even more significant.

Despite its limited role, Tehran has served as an alternative transit and energy partner for Asian economies seeking to avoid complete dependence on Gulf maritime routes through the Strait of Hormuz.

But Iran, facing growing pressure along its northern borders and increasing isolation in the Gulf, has become a less reliable partner in that role.

This is encouraging energy planners across Asia, including in Beijing despite China’s 25-year strategic partnership with Tehran, to accelerate the diversification of overland routes through the Caucasus and Central Asia.

The battle over constitutional reform

None of these scenarios, however, is guaranteed. Armenia’s election result marks the beginning of a new process rather than its conclusion.

Pashinyan’s Civil Contract party secured 49.8% of the vote, winning 64 of the 105 seats in parliament. It retained its majority but fell short of the two-thirds threshold required to amend the constitution, complicating efforts to conclude a final peace agreement with Azerbaijan.

Azerbaijan has made its approval of a peace treaty conditional on constitutional changes in Armenia removing any language that could be interpreted as a claim over Nagorno-Karabakh, which Baku regained control of in 2023.

The Armenian constitution contains no direct claim to Azerbaijani territory. The dispute instead concerns its preamble, which endorses the principles and aspirations of the 1990 Declaration of Independence.

That document explicitly refers to a December 1, 1989 decision on the “reunification” of Armenia and Nagorno-Karabakh, a territory internationally recognised as part of Azerbaijan.

As a result, Armenia’s constitutional framework remains linked to a founding document that contains a claim over internationally recognised Azerbaijani territory.

Without constitutional reform, any peace agreement could be overturned by a future government, undermining the long-term stability that Asian economies dependent on transport corridors would require before committing substantial investment to the region.

The author argues that constitutional reform would be neither exceptional nor unprecedented, noting that numerous countries have amended their fundamental laws in pursuit of peace or strategic objectives.

Ireland amended its constitution as part of the Good Friday Agreement, creating a cornerstone of the peace settlement with the United Kingdom.

Greece similarly insisted for years on constitutional changes in Macedonia, eventually leading to the Prespa Agreement and paving the way for North Macedonia to join European and transatlantic institutions.

The most realistic path for Pashinyan, the author argues, would be to form a narrow coalition focused exclusively on peace-related provisions, presenting them as technical requirements for international normalisation rather than partisan concessions.

His success in securing the additional votes will determine whether Armenia’s westward orientation and the broader opening of the South Caucasus corridor become irreversible.

For Asian governments and companies assessing Eurasian trade, energy, and mineral routes over the next decade, Armenia’s constitutional dispute is not merely an internal matter in a former Soviet republic.

It is a genuine test of whether one of the few remaining alternative corridors between Asia and Europe can achieve lasting stability and of which powers will ultimately establish its rules.

China and Japan both have strong incentives for the peace process to succeed, despite their limited ability to control its direction.

Moscow is already working to obstruct it, while Tehran watches with concern.

The author concludes that Beijing and Tokyo should follow developments with equal attention and work toward a South Caucasus finally capable of serving as a stable and effective trade corridor.

US stocks declined on Friday as investors reassessed the artificial intelligence-driven rally that has pushed markets higher since the beginning of the year, deepening a selloff in semiconductor shares as the launch of a new Chinese AI model added further pressure on the sector.

After a powerful rally lifted the major indexes to record highs, investors began reducing their exposure to chipmakers amid growing concerns over the scale of spending on artificial intelligence and the returns those investments are likely to generate.

Chip stocks extended losses from the previous session, with Nvidia shares falling 1.4%.

The decline, combined with an early rise in Apple shares, briefly allowed the iPhone maker to reclaim the title of the world's most valuable company from Nvidia.

Chinese competition weighs on technology shares

The Philadelphia Semiconductor Index fell 1.8% and was on track for its worst weekly performance since March, having lost more than 20% from the record high reached in late June.

Fiona Cincotta, Senior Market Analyst at City Index, said the current market moves "appear to be driven primarily by the decline in chip stocks, which is weighing on broader market sentiment."

Pressure intensified after Chinese artificial intelligence startup Moonshot AI announced the launch of its Kimi K3 model, which contains 2.8 trillion parameters and is described by the company as the world's largest open-weight model.

Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones Investments, said growing competition from Chinese open-source models had raised concerns over whether US companies could maintain their technological lead.

Some Chinese models are now approaching the performance of systems developed by Anthropic and OpenAI, he said, contributing to weakness in technology shares. The pressure began in Asian markets before spreading to Wall Street.

All three major US indexes were heading for weekly losses despite a strong start to the second-quarter earnings season and better-than-expected inflation data, as concerns surrounding the semiconductor sector overshadowed the positive developments.

Netflix drops 9% as Wall Street's fear gauge rises

Netflix shares fell 9% after the company's third-quarter outlook came in below Wall Street estimates, weighing on the communication services sector, which declined 2.4%.

The CBOE Volatility Index, widely known as Wall Street's fear gauge, rose 1.30 points to 18.03, its highest level in more than a week.

By 10:10 a.m. Eastern Time, the Dow Jones Industrial Average was up 4.56 points, or 0.01%, at 52,557.53.

The S&P 500 fell 43.71 points, or 0.58%, to 7,490.05, while the Nasdaq Composite dropped 323.79 points, or 1.25%, to 25,558.15.

The Nasdaq had earlier fallen to its lowest level in three weeks before recovering part of its losses.

Middle East tensions remain in focus

Geopolitical developments in the Middle East continued to influence markets after the United States launched strikes on bridges and an airport in Iran, while Tehran responded by targeting a power generation and desalination plant in Kuwait.

Meanwhile, data showed US consumer sentiment rose in July to its highest level in five months. Analysts, however, said the improvement could prove temporary as renewed US-Iran tensions drove gasoline prices higher.

Among other stocks, Intuitive Surgical shares fell around 11.4% after the medical device maker left its forecast for growth in the use of its da Vinci surgical system unchanged and warned that changes to health insurance plans could prompt patients to postpone some procedures.

Declining stocks outnumbered advancing shares by a ratio of 1.24 to 1 on the New York Stock Exchange and 1.55 to 1 on the Nasdaq.

Cryptocurrencies traded lower on Friday as investors continued to assess the impact of the escalating exchange of military strikes between the United States and Iran, which boosted demand for safe-haven assets and weighed on risk appetite.

Bitcoin fell more than 1% during the session, slipping back below the $63,000 level as it extended its pullback from this week's high of $65,600.

Other major cryptocurrencies also came under pressure. Ethereum retreated toward its short-term support level at $1,800, while XRP remained below the key $1.10 threshold.

Geopolitical tensions weigh on risk appetite

US forces continued military operations for a sixth consecutive night, targeting sites in southern Iran. Meanwhile, Al Jazeera cited officials in Bandar Abbas as saying civilian infrastructure, including electricity facilities and a railway station, had been damaged in the strikes.

At the same time, Reuters, citing sources, reported that Iran had asked Yemen's Houthis to prepare to shut down the Red Sea oil export route if the United States escalates attacks on Iranian energy infrastructure, raising fresh concerns over global energy markets.

Despite the renewed tensions, the cryptocurrency market remained relatively resilient, although investor sentiment stayed weak. The Crypto Fear & Greed Index rose to 27 on Friday from 25 a day earlier but remained firmly in "Fear" territory.

The market's relative stability was supported by softer US inflation data released earlier in the week, which triggered a temporary rebound in higher-risk assets, including Bitcoin, Ethereum, and XRP.

Bitcoin ETF inflows slow while XRP sees modest improvement

Inflows into spot Bitcoin exchange-traded funds continued but slowed to around $79 million on Thursday, down from $108 million on Wednesday and $181 million on Tuesday.

Analysts believe steady institutional demand in the coming weeks could help absorb selling pressure linked to geopolitical tensions and pave the way for another attempt to break above the $65,000 level.

Meanwhile, spot Ethereum ETFs recorded net outflows of $28 million on Thursday, ending two consecutive days of positive inflows totaling $54 million on Wednesday and $58 million on Tuesday.

The outflows coincided with Ethereum retreating from its weekly high of $1,947, highlighting investors' continued reluctance to increase exposure to higher-risk assets.

XRP, by contrast, returned to positive territory, with its spot ETFs attracting around $7 million in net inflows on Thursday, according to SoSoValue, following three days of subdued activity.

Those inflows lifted total invested assets to $1.49 billion, while average net assets reached approximately $997 million.

Market observers believe sustained demand for US-listed XRP ETFs will be key to absorbing spot market selling pressure and supporting a more durable recovery in the cryptocurrency.