Gold recovered modestly on Tuesday as a softer U.S. dollar provided some support to bullion, but renewed instability in the Middle East kept investors focused on the potential for energy supply disruptions, persistent inflation and additional interest-rate increases.
At 00:32 ET (04:32 GMT), XAU/USD rose 0.5% to $4,191.76 an ounce, while Gold Futures gained 0.6% to $4,215.87. XAG/USD advanced 0.3% to $60.5000 an ounce, while XPT/USD climbed 0.3% to $1,697.26. XPD/USD rose 0.4% to $1,147.50. The U.S. Dollar Index fell 0.2% to 102.43.
Tension in the Middle East and energy prices
Spot gold traded around $4,160 an ounce after ending the previous session down 0.5%. Brent crude neared $106 a barrel as attacks by Iran-backed Houthi forces on Saudi Arabia's main airport heightened pressure on Washington to deliver further support to its regional ally.
The spread of conflict has prompted concerns that additional disruptions to energy supplies could push oil prices higher and extend inflationary pressures. Since the U.S.-Iran war erupted in late February, gold has fallen by roughly one fifth amid rising global inflation concerns and a tighter stance from central banks.
Higher borrowing costs usually work against gold because the non-yielding metal becomes less attractive compared with interest-bearing instruments. Ongoing inflation and significant government borrowing have kept interest rates and bond yields elevated, which has further limited bullion's appeal.
Earlier in the Asian session, spot gold was down at $4,156.27 an ounce. Silver declined 0.5% to $59.93 an ounce, while platinum and palladium also moved lower.
Markets eye U.S. inflation data and Fed path
Traders are focused on U.S. inflation data due on Wednesday for guidance on the Federal Reserve's next move, following the Fed's decision to tighten policy last month. Interest-rate swaps imply roughly a 20% probability of another increase at the Fed's October meeting, while markets are pricing in one additional rate hike before the end of the year.
Federal Reserve Bank of Cleveland President Beth Hammack said on Monday that smaller, more frequent adjustments to monetary policy could help keep inflation expectations anchored. However, she stopped short of endorsing an interest-rate increase in October.
Policymakers are navigating persistent inflation risks and elevated borrowing costs. Further increases in energy prices could complicate the inflation outlook and bolster expectations that rates may need to stay higher for longer or rise further.
Given that, Wednesday's U.S. consumer price index report is likely to act as a key catalyst for precious metals. Stronger-than-expected inflation would reinforce the case for additional monetary tightening and could weigh on non-interest-bearing gold, while softer-than-expected figures might ease some of the pressure around further rate hikes.
Outlook
For now, investors are balancing the potential inflationary impact of Middle East tensions on oil markets against the Federal Reserve's policy trajectory. Both forces are expected to shape demand for bullion in the near term.