Gold set for biggest weekly drop

Gold rose on Friday but was on track for its biggest weekly loss in six. This came as escalating US-Iran tensions drove energy prices higher. The situation fuelled inflation fears and reinforced expectations of US interest rate hikes.

Spot gold was up 1 percent at 4,011.29 dollars per ounce by 2:20 p.m. EDT. Prices touched their lowest level since June 30 earlier in the session. They were down around 2.6 percent so far for the week.

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US gold futures for August delivery settled 0.7 percent higher at 4,018.80 dollars. The US dollar rose for a second straight session. This made bullion more expensive for overseas buyers.

Chris Gaffney, president of world markets at EverBank, commented on the trend. He said the main drivers of the selloff in gold have been a stronger US dollar and higher global inflation fears.

He added that these factors have sent global interest rates higher. The US escalated its renewed bombing campaign on Iran on Friday. It hit bridges and an airport.

Tehran responded with strikes on US bases across the Middle East. Brent crude oil prices were up around 16 percent for the week following the attacks. Bullion has fallen about 25 percent since the US-backed war began.

The war with Iran started in late February. It has pressured gold by raising expectations that war-driven inflation could keep interest rates higher for longer. While gold is a hedge against inflation, higher rates typically weigh on it.

The non-yielding metal faces pressure from climbing global interest rates. Gaffney said recent data decreased the probability of a rate hike at the next FOMC meeting. However, global interest rates continue to climb.

He noted the recent increase in oil prices could drive the Federal Reserve to take a more hawkish stance on US interest rate policy. Traders see about a 58 percent chance of a US interest rate hike in September.

This calculation is according to the CME FedWatch Tool. On Thursday, Fed Vice Chair Philip Jefferson suggested he would be open to raising rates. This would happen if there was no near-term improvement in inflation.

Goldman Sachs said in a note that gold’s share in private portfolios remains low. It added that recent geopolitical developments, including Iran and broader tensions, may accelerate diversification.