Gold Steadies After Sharp Drop as Markets Assess Middle East Risks

Gold prices were little changed at around $4,050 per ounce on Friday, steadying after a nearly 2% drop in the previous session as investors monitored developments in the Middle East for clues on energy-driven inflation risks and the outlook for US interest rates. Higher oil prices, driven by concerns over Gulf supply disruptions, have reinforced expectations that interest rates could remain higher for longer, reducing the appeal of non-yielding gold. Investors now await next week's Federal Reserve meeting, where rates are widely expected to remain unchanged, though markets still price in an roughly 80% chance of a hike in September. Meanwhile, the European Central Bank kept rates unchanged on Thursday while leaving the door open to a September increase. In Asia, gold discounts in India widened to a seven-week high as higher prices curbed demand, while buying interest improved in China.

Gold prices fell toward $4,030 per ounce on Friday, extending a nearly 2% decline in the previous session, as surging oil prices fueled by the escalating Middle East conflict strengthened the case for tighter US monetary policy. President Donald Trump warned of expanded military action against Iran and vowed to hold Tehran accountable for any future Houthi attacks on commercial vessels in the Red Sea, helping lift Brent crude above $100 a barrel for the first time since May. Higher oil prices stoked inflation fears, boosting expectations of tighter Fed policy and pressuring non-yielding assets. Markets currently assign a 34% probability to a Fed rate hike next week, while the odds of a September increase have climbed above 81%. Meanwhile, fresh US tariffs of 10%–12.5% on imports from major trading partners added to the uncertain market backdrop. Gold is still heading for a modest weekly gain.

Gold prices fell below $4,100 per ounce on Thursday, pulling back from two-week highs as escalating tensions in the Middle East lifted oil prices and fueled expectations that the US Federal Reserve could raise interest rates later this year. The Iran-backed Houthis said they had targeted two Saudi oil tankers as part of a naval blockade, raising concerns over a potential new chokepoint for global oil supplies. Meanwhile, the US carried out a 12th consecutive night of strikes on Iran, prompting further retaliation and intensifying fears of prolonged disruptions to Gulf energy exports. Higher oil prices have reinforced inflation concerns, leading investors to expect the Fed to keep monetary policy tighter for longer, a backdrop that typically weighs on non-yielding assets such as gold. Money markets are currently pricing in roughly a 78% probability of a Fed rate hike in September.