Higher Oil Prices Shift Fed Rate Expectations, Weighing on Gold

Spot gold prices fell 0.4% to $4,726.64 per ounce on Monday, retreating further from recent highs as rising oil prices and a firmer dollar rekindled inflation fears and eroded expectations for Federal Reserve rate cuts this year. The drop extended gold’s losses since the start of the Middle East conflict, with prices now down more than 11% as elevated interest rates suppress demand for the non-yielding metal.

The decline followed a surge in oil prices back above $100 a barrel, triggered by the collapse of US-Iran peace talks and the US announcement of plans for a naval blockade of the Strait of Hormuz. Iran’s Revolutionary Guards responded with a warning that any military vessels approaching the strait would be met with force, escalating regional tensions and reinforcing market concerns about supply disruptions.

The rise in oil prices lifted the US dollar by 0.3%, increasing the cost of dollar-denominated gold for foreign buyers. It also reignited speculation that central banks, including the Fed, may hold rates higher for longer—or even consider hikes—to contain inflation.

"Once oil prices move above $100, attention shifts to potential central bank rate hikes to curb inflation, which weighs on gold’s performance," said Tim Waterer, chief market analyst at KCM Trade. Earlier in the year, traders had priced in two rate cuts before the conflict escalated in late February. Now, those expectations have all but disappeared.

Among other precious metals, silver dropped 1.9% to $74.41 per ounce, platinum edged down 0.2% to $2,041.89, and palladium rose 0.5% to $1,527.95. Gold has not only lost its luster in the face of tighter monetary policy expectations but has also failed to benefit from the very geopolitical risks that typically boost its appeal.

Gold has declined more than 11% since the start of the Middle East conflict, as elevated rates and stronger dollar continue to dampen demand.