LONDON: Gold prices declined on Wednesday after surging more than 2% in the previous session, as rising oil prices renewed concerns over inflation and the outlook for US interest rates, reducing demand for the non-yielding precious metal.
Spot gold fell 0.6% to $4,028.43 per ounce by 0443 GMT, while US gold futures for August delivery dropped 0.8% to $4,035.50 per ounce.
The decline followed a sharp rally on Tuesday, when gold climbed to as high as $4,100.49 per ounce after US inflation data showed consumer prices slowed more than expected in June.
Why Did Gold Prices Decline?
Market sentiment shifted after oil prices extended gains for a third consecutive session, driven by escalating tensions in the Middle East.
The rally in crude oil came after US President Donald Trump reimposed a naval blockade on Iranian ports and threatened further strikes on Iran’s energy infrastructure unless Tehran resumed negotiations.
Higher oil prices have renewed fears that inflation could remain elevated, prompting investors to reassess expectations for US monetary policy.
Analysts noted that while gold is traditionally viewed as a hedge against inflation, higher interest rates reduce its appeal because the metal does not generate interest or yield.
How Are Inflation and Fed Expectations Influencing Markets?
Despite softer-than-expected US consumer inflation data for June, Federal Reserve officials indicated that additional evidence of easing price pressures would be required before changing the policy outlook.
Investors are now awaiting the release of the US Producer Price Index (PPI) later on Wednesday for further indications about inflation trends.
According to the CME FedWatch Tool, traders currently see a 58% probability of a US Federal Reserve interest rate increase in September, down from 76% before the inflation report, while markets continue to price in an approximately 80% chance of a rate hike in December.
In other precious metals trading, spot silver fell 0.5% to $58.35 per ounce, platinum edged down 0.1% to $1,629.89, and palladium declined 0.2% to $1,302.10.