Gold Declines as Fresh US Strike Threats Revive Inflation Fears

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(Bloomberg) — Gold fell after reports that the US is considering a wider scope of attacks on Iran renewed concerns of a possible interest-rate hike to keep inflation in check.

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Bullion declined as much as 0.7% to near $4,025 an ounce, having risen 1.3% on Tuesday after a softer-than-expected inflation print in the US. President Donald Trump discussed widening the offensive against Iran beyond the current campaign around the Strait of Hormuz, Axios reported, while the Islamic Revolutionary Guard Corps said the strait and other routes will be closed until the US ends its attacks.

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Washington also resumed its blockade of Iranian vessels and launched strikes designed to degrade the Islamic Republic’s ability to attack commercial shipping in the region. Oil rose for a third day. Trump, however, backed away from his plan to impose a 20% charge on cargo shipments through Hormuz.

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The latest flare-up in fighting has renewed worries that energy prices will stay high, partially offsetting bullion’s gains a day earlier when US inflation came in lower than expected. The instability has raised the likelihood that the Federal Reserve may ultimately keep interest rates higher for longer, creating headwinds for non-yielding precious metals.

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Data released Tuesday showed US consumer prices declined in June for the first time in six years, prompting a rally in the bond market as traders unwound bets on a rate hike as soon as this month. Separately, however, Fed Chairman made it clear that rates were among the options at his disposal to keep inflation within a promised 2% target.

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Gold has edged higher this month after losing 14% in the second quarter, its worst showing since 2013. The retreat was driven by expectations the Fed could tighten policy, with the US dollar and Treasury yields gaining ground. Bullion-backed exchange-traded funds, a key way for investors to gain exposure to gold, have also seen consistent net outflows in recent months.

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The unexpectedly sharp slowdown in inflation in June has bought the Fed more time to consider its options. Swap traders are now pricing in only a 17% chance of a rate hike in July, down from nearly 50% the day earlier. But the period covered by the data preceded the resumption of hostilities.

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“The CPI print will help cement the $4,000 level as a floor for gold but Warsh’s comments were quite hawkish, which limits enthusiasm around the potential for lower interest rates,” said Justin Lin, an analyst at Global X ETFs. “This round of CPI also does not account for renewed US-Iran strikes and the latest rise in crude, so markets may discount the print in favor of future signals,” he said.

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Spot gold slipped 0.6% to $4,026.70 an ounce at 1:15 p.m. in Singapore. Silver fell 0.8% to $58.26 an ounce, after advancing 1.8% on Tuesday. Platinum rose marginally, while palladium traded lower. The Bloomberg Dollar Spot Index, a gauge of the US currency, was down 0.1%.

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