By: Economy Middle East

Gold prices fell on Friday and were heading for a weekly decline, as heightened tensions in the Middle East weakened prospects for a U.S.-Iran peace deal and intensified concerns over inflation and potential interest rate increases.

As of 4:35 GMT, spot gold dropped 0.85 percent to $4,439.18 per ounce, bringing its losses for the week to around 2.2 percent. U.S. gold futures for August delivery also retreated, falling 0.82 percent to $4,468.10.

In the UAE, gold rates posted a decline, with 24-carat gold losing AED2.75 to AED535.75 and 22-carat gold falling AED2.5 to AED496.

Additionally, 21-carat gold edged AED2.5 lower to AED475.5, and 18-carat gold fell AED2 to AED407.75.

Meanwhile, 14-carat gold fell AED1.5 to AED318.

Mideast peace efforts face setback

The rejection of a new ceasefire proposal in Lebanon by Iran-backed Hezbollah, coupled with Israel’s insistence that it would not withdraw its troops from the country, dealt a setback to U.S. President Donald Trump’s efforts to end the conflict and advance broader peace talks with Tehran.

“Gold prices remain under pressure from current geopolitical tensions in the Middle East and growing expectations that the Federal Reserve may continue its strict monetary policy stance longer. The firmer U.S. dollar and higher interest rate expectations pressure is weighing on the metal,” said Vijay Valecha, Chief Investment Officer, Century Financial.

“While the U.S.-Iran tensions would typically support the haven demand, the U.S. dollar and current U.S. economic data have limited upside momentum for the bullion,” he added.

Investors price 51 percent chance of a rate hike by December

On the monetary policy front, Jeffrey Schmid said on Thursday that the U.S. Federal Reserve faces a choice between keeping interest rates unchanged for longer or raising them further to curb inflation, which has remained above the central bank’s target for several years.

Separately, Mary Daly said the future path of U.S. interest rates will depend on incoming economic data. She added that monetary policy is currently in a good position and that the Fed is prepared to adjust its stance as needed in either direction.

Although gold is traditionally viewed as a hedge against inflation, higher interest rates tend to reduce its appeal because the metal does not generate yield.

Markets are currently pricing in the possibility of a Federal Reserve interest rate increase before the end of the year, with a 51 percent probability of a hike by December. Investors are now focused on the release of the U.S. nonfarm payrolls report for May later in the day, which could provide further clues about the Fed’s next policy moves.

“Investors will closely monitor Friday’s Nonfarm Payrolls report, adding another layer of pressure on precious metals coming from movements in oil prices, U.S. jobless claims data, and market positioning ahead of. Geopolitics remain the forefront of market sentiment, although there are broader hopes for de-escalations, tensions are still strong between Israel and Lebanon, with potential threats to Beirut,” Valecha added.

Other precious metals

As gold prices declined, the precious metals market saw downward movement on Friday. Spot silver fell 1.5 percent to $72.65 per ounce, platinum declined 0.90 percent to $1,876, and palladium dropped 0.86 percent to $1,285. All three metals were also on track to post weekly losses.