Gold Prices Decline Amid US-Iran Tensions and Rate Hike Expectations

Spot gold prices experienced a significant decline as hostilities between the United States and Iran escalated over the weekend in the Middle East. This development drove energy prices higher, reigniting global inflation concerns and strengthening expectations that the Federal Reserve may need to raise interest rates to contain price pressures. While gold is traditionally considered a safe-haven asset, its appeal diminished in the face of rising interest rates and a strengthening U.S. dollar.

The weekend of July 11-12 saw an exchange of fresh strikes between the U.S. and Iran. U.S. forces conducted a fourth round of strikes within a week in response to an attack on a container ship. Iran claimed to have closed the Strait of Hormuz, a critical oil transit chokepoint, but the U.S. denied this, asserting the waterway remained open and that it was escorting vessels. U.S. President Donald Trump pledged to intensify bombardment until Tehran ceased attacks on ships and agreed to open the Strait of Hormuz, stating the U.S. would act as "THE GUARDIAN OF THE HORMUZ STRAIT" and demand a 20% reimbursement on all cargo shipped. Tensions further escalated with large-scale U.S. airstrikes on targets along Iran's southern coast, including Bandar Abbas, Qeshm Island, and Chabahar Port. Iran retaliated with missiles and drones and threatened to block the Bab al-Mandeb Strait.

Following these developments, spot gold slid as much as 1.6% on July 13 to trade near US$4,050 an ounce, having already lost 1.4% in the preceding week. In subsequent days, gold prices dipped below $4,000, fluctuating between $3,974.86 and $4,013 per ounce. Gold had already fallen by more than a fifth since the Iran conflict began in late February and posted a 14% loss in the second quarter of 2026, marking its worst quarterly performance since 2013. Silver prices also saw significant declines, falling as much as 3.1% on July 13 and 3.93% on July 16. In the oil markets, Brent crude topped $85 a barrel, extending its climb, while West Texas Intermediate (WTI) crude traded around $73.75, driven by fears of supply disruptions in the Strait of Hormuz.

The escalation of tensions in the Middle East has driven up energy prices, bringing global inflationary pressures back into focus. Higher oil prices intensify concerns that central banks may be forced to maintain higher interest rates for longer to combat inflation. For gold, a non-yielding asset, rising interest rates increase the opportunity cost of holding it, thereby reducing its attractiveness. This, coupled with a strengthening U.S. dollar and rising bond yields, placed additional downward pressure on gold prices.

Minutes from the Federal Reserve's June meeting indicated that some policymakers saw a case for raising rates, reflecting growing concern among U.S. central bank officials over inflation. The U.S. economy's demonstrated resilience to energy shocks has reinforced the Fed's inclination to maintain relatively high interest rates. However, June's U.S. Consumer Price Index (CPI) data, which showed a month-on-month decline of 0.4% exceeding market expectations, temporarily eased rate hike fears. Despite this, persistently high oil prices could prolong the tightening cycle. Goldman Sachs analysts believe the war's inflationary shock on the U.S. economy is fading, projecting the Fed to keep interest rates unchanged this year. However, they warned that if oil prices reach $100 per barrel, it could trigger supply shocks and unanchor inflation expectations, significantly complicating future monetary policy decisions.

Market analysts anticipate that unless the fighting in the Middle East significantly subsides, elevated oil prices, firmer yields, and a stronger dollar will continue to exert pressure on gold prices. Ryan McKay, senior commodity strategist at TD Securities, noted that precious metals came under selling pressure as oil prices moved back into the $80s/bbl range. Analysts at Morgan Stanley foresee gold prices moving higher, but this is contingent on the Fed refraining from additional rate hikes. Markets have largely priced in a 25 basis points rate hike by year-end and nearly 50 basis points of tightening over the next twelve months. According to CME Group's FedWatch tool, there's roughly a 53% probability of a rate hike in September. Christopher Wong, a strategist at Oversea-Chinese Banking Corp., emphasized that an upside in gold would require oil prices to ease further and hawkish rhetoric from the Fed to dial down.