Gold edges up amid lower oil prices, ongoing U.S. rate hike expectations

Gold prices inched higher on Monday, as easing Middle East tensions weighed on oil prices and calmed some jitters around a possible hawkish shift in central bank policy due to an energy-driven inflation burst.

By 08:46 ET (12:46 GMT), spot gold had edged up by 0.3% to $4,341.62 an ounce, while gold futures had risen slightly by 0.1% to $4,366.80 an ounce. In the previous session, the yellow metal fell to its lowest since March 23 but later pared losses to end largely flat.

Markets have been keen for U.S. President Donald Trump to make a peace deal with Iran which would reopen the Strait of Hormuz, a critical waterway for a fifth of the world’s oil that has been effectively shuttered to tanker traffic for months, blocking key supplies to countries around the world and elevating oil prices.

Trump said on Monday evening that the U.S. was close to reaching a peace deal with Iran, adding that the strait would be open once it is signed. Speaking during a virtual rally, Trump also claimed that the U.S. had “decimated” Iran’s military and top leadership.

“I think we are winning that battle, but you’re really gonna win it over the next two weeks when we declare total victory,” Trump said. “It’ll happen very soon and oil prices will come tumbling down.” 

Brent crude futures, the global oil benchmark, had last fallen by 1.8% to $92.51 a barrel, sitting below recent peaks but remaining well above pre-war levels.

Worries have abounded that the spike in oil prices will fuel a wave of inflationary pressure, leading central banks to respond by hiking interest rates. This may not bode well for gold, a non-yielding asset that tends to underperform in elevated rate environments.

The U.S. dollar also weakened, potentially making gold more attractive to overseas buyers. Yet the greenback continued to top levels before the start of the Iran conflict in late February, buoyed in part by the belief that the U.S., as a major energy exporter, could be relatively insulated from an oil shock brought on by the fighting.

In a note, analysts at ING said that "the dominant story" in foreign-exchange markets revolves around the possibility for Federal Reserve policy tightening. Last week, expectations that the Fed will hike rates this year were bolstered by a robust U.S. labor market report.

Investors are now turning their focus to upcoming consumer and producer price inflation data, due out on Wednesday and Thursday, respectively.

"The market looks positioned for some firm data here and a far less dovish FOMC meeting in a week’s time," the ING analysts said.