Gold retreats at the close of July as renewed Middle East tensions lift the US dollar

Gold prices declined during European trading on Friday, the final session of July, pulling back from a one-week high as traders locked in profits and a stronger US dollar weighed on the precious metal amid escalating geopolitical tensions in the Middle East and continued military exchanges between the United States and Iran.

Despite Friday's decline, gold remains on track to post its first monthly gain in five months, supported by bargain buying around the key $4,000-per-ounce level and reduced expectations for additional US interest rate hikes this year.

The Price

• Gold fell 0.75% to $4,072.11 per ounce from the opening level of $4,103.48, after reaching an intraday high of $4,111.81.

• At Thursday's settlement, gold gained about 0.9% for its second consecutive daily advance, closing at its highest level in one week at $4,120.34 per ounce, supported by a weaker US dollar.

Monthly performance

• With July trading set to conclude following Friday's settlement, gold is up more than 1.5% for the month and is on track to record its first monthly gain since February.

• The monthly advance has been driven by bargain buying from seven-month lows, along with increased investment flows around the key $4,000-per-ounce threshold.

US dollar

The US Dollar Index rose more than 0.25% on Friday and is on track for its first gain in four sessions after rebounding from a six-week low of 99.86.

A stronger US dollar makes dollar-denominated gold more expensive for holders of other currencies, reducing its appeal to international buyers.

In addition to bargain buying, the dollar has benefited from renewed safe-haven demand as geopolitical tensions in the Middle East intensified following continued military exchanges between the United States and Iran.

Developments in the Iran conflict

• The United States launched a new wave of large-scale airstrikes targeting dozens of sites linked to Iran's Islamic Revolutionary Guard Corps.

• Iran continued its military response with missile and drone attacks targeting US-linked sites and allied assets.

• Regional tensions escalated further after a US gas vessel was attacked by a drone at Egypt's Damietta port.

• Saudi Arabia announced it would lead a 14-country maritime coalition aimed at strengthening security in the Red Sea, Bab el-Mandeb, and the Arabian Gulf.

• Diplomatic efforts remain underway despite the escalation, with regional contacts continuing in an attempt to contain the crisis and reduce tensions, although no new ceasefire agreement or comprehensive return to negotiations has been announced.

Federal Reserve

As widely expected, the Federal Reserve left interest rates unchanged on Wednesday for a fifth consecutive meeting.

The decision exposed a clear split among policymakers, with nine officials voting to keep the federal funds rate unchanged at 3.50% to 3.75%, its lowest level since September 2022, while three members dissented in favor of an immediate 25-basis-point rate increase to curb inflation.

The dissenting, more hawkish members were Beth Hammack, President of the Cleveland Fed, Neel Kashkari, President of the Minneapolis Fed, and Lorie Logan, President of the Dallas Fed.

The Federal Reserve said inflation remains above its long-term 2% target, with some price pressures continuing to stem from supply-side factors, particularly energy.

Fed Chair Kevin Warsh reiterated the central bank's commitment to returning inflation to its 2% target but stopped short of offering clear guidance on the timing of the next policy move, emphasizing that future decisions will depend on incoming economic data.

US interest rates

• According to CME Group's FedWatch Tool, markets currently assign a 33% probability that the Federal Reserve will leave interest rates unchanged at its September meeting, while the probability of a 25-basis-point rate increase stands at 67%.

• For the December meeting, markets price in a 13% probability that rates will remain unchanged and an 87% probability of a 25-basis-point increase.

• Investors will continue to monitor upcoming US economic data and comments from Federal Reserve officials to reassess the outlook for monetary policy.

Economic Outlook

We expect today's decline in gold prices to remain primarily driven by profit-taking and the rebound in the US dollar. Gold could resume its upward trend if the dollar weakens and geopolitical tensions in the Middle East begin to ease.

SPDR Gold Trust

Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, declined by 1.43 metric tons on Thursday, bringing total holdings down to 1,007.87 metric tons from 1,009.30 metric tons, which had been the highest level since June 24.