Gold Drops as Oil Surge Stokes Fears of Higher Interest Rates

Gold fell, pressured by a stronger US dollar and concern about the prospect of higher interest rates, as the war in the Middle East extended into a second week and oil rallied.

Bullion slumped as much as 3% to around $5,015 an ounce, before paring losses. Oil jumped — Brent futures at one point neared $120 a barrel before the spike eased — as producers in the Persian Gulf region curbed output with the US-Israeli war with Iran showing no sign of resolution. A gauge of the dollar climbed as much as 0.7%.

Bullion has come under pressure as crude’s rally stokes inflation fears in the US, raising the likelihood that the Federal Reserve will leave interest rates unchanged for longer, or even raise them. Higher borrowing costs, as well a stronger dollar, are typically negative for precious metals, which don’t pay interest. Gold has also served as a source of liquidity during a deepening rout in global equities.

“In periods of geopolitically driven market stress, investors sometimes sell assets such as gold to raise cash,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “Once that phase passes, geopolitical uncertainty typically continues to underpin demand for safe havens on dips.”

The war in the Middle East has now entered its 10th day. Over the weekend, Tehran picked a new supreme leader and kept up attacks in the Persian Gulf region, while Israel struck fuel depots in the Iranian capital and threatened the Islamic Republic’s power grid. Attacks on energy infrastructure and a halt to shipping through the Strait of Hormuz, which normally handles a fifth of the world’s oil, have driven up prices of crude and natural gas.