Gold Prices Slip as Oil Rally Fuels Inflation Fears, Strengthens Dollar

Gold prices declined early Thursday as rising oil prices reignited concerns that inflation could remain persistent, reinforcing expectations that the Federal Reserve may keep interest rates elevated for longer. The stronger U.S. dollar and higher Treasury yields weighed on demand for the non-yielding precious metal.

At 21:31 ET (01:31 GMT), spot gold (XAU/USD) fell 0.59% to $4,036.62 per ounce, while Gold Futures slipped 0.24% to $4,042.10.

The decline came despite softer-than-expected U.S. inflation data. Producer prices unexpectedly dropped 0.3% in June, following weaker consumer inflation figures released earlier in the week. The back-to-back reports suggested underlying price pressures are easing, reducing expectations of an immediate Federal Reserve rate hike.

However, markets shifted their attention to escalating geopolitical tensions in the Middle East, where renewed conflict pushed crude oil prices higher for a fourth consecutive session. Investors are increasingly concerned that sustained gains in energy prices could reverse recent progress on inflation, limiting the Fed's flexibility to ease monetary policy.

Federal Reserve Chair Kevin Warsh reaffirmed that policymakers remain committed to returning inflation to the central bank's 2% target and said officials are prepared to adjust interest rates if price pressures persist. He also dismissed concerns that increased investment in artificial intelligence alone would significantly drive inflation.

Other Fed officials echoed a cautious stance. Governor Lisa Cook said she would support additional policy action if inflation remains elevated, while New York Fed President John Williams stated that current interest rates are appropriately positioned to guide inflation back toward target.

Meanwhile, geopolitical risks continued to support oil prices. The United States carried out a fifth consecutive day of strikes on Iranian targets, while President Donald Trump pledged to intensify military operations until Iran stops attacks on commercial shipping and reopens the Strait of Hormuz.

Brent and WTI crude extended recent gains as traders monitored potential supply disruptions through the vital shipping route. Rising energy costs could complicate the Fed's inflation outlook by keeping price pressures elevated, supporting the dollar and Treasury yields while reducing the appeal of gold.

ANZ analysts said the key issue for investors is whether the Federal Reserve views the recent oil price surge as a temporary supply shock or a longer-lasting inflation risk that could delay future policy easing.