Gold Slips as Rate Bets Trump Gulf Risk, but Central Bank Buying Sets a Record

Gold ends Thursday at $4,351.19 an ounce as Gulf tensions are outweighed by rising Fed rate-hike bets; central bank buying offers support.

A fresh escalation in the Persian Gulf — normally the kind of headline that sends investors scrambling for bullion — barely registered in gold pricing on Thursday. Instead, the metal took its cues from Washington, where a hotter-than-expected inflation reading reshuffled the interest-rate calculus and pushed the dollar higher.

Iran reported an attack on ten vessels near the Strait of Hormuz, retaliation for the sinking of five Iranian oil tankers by the United States. The Revolutionary Guard vowed further escalation, marking the most extensive exchange of strikes on regional shipping to date. Yet the safe-haven bid that such a confrontation would typically trigger was overwhelmed by a different force: mounting conviction that the Federal Reserve will lift borrowing costs at its September 16 meeting.

Producer Prices Tip the Scales

US producer prices rose 0.4% month-on-month and 5.4% year-on-year, outpacing the 5.3% consensus estimate. The surprise jolted rate markets. Within a week, the probability priced in for a Fed hike at the September gathering jumped from 40% to more than 70%.

That shift is a clear headwind for a metal that pays no yield, since higher rates raise the opportunity cost of holding gold relative to interest-bearing assets. Spot gold changed hands at $4,351.19 an ounce, up 0.8% on the day — supported, it appeared, by hedging demand tied to the Gulf conflict — but down 1.8% over the week as rate-hike odds surged.

The European Central Bank was also in the spotlight, with a rate decision scheduled for 14:15 and an increase seen as highly likely. Economists surveyed by Reuters, however, expect the Fed to leave its benchmark rate unchanged at the September meeting and through the rest of 2026 — a contradiction with the short-term market pricing that is adding to uncertainty in futures markets.

A Week of Violent Swings

Thursday's retreat fits a pattern of sharp reversals. On Wednesday, gold climbed 1.4% to $4,414.30 as the dollar came under pressure and traders awaited the inflation print. Earlier in the week, robust US employment data had already bolstered rate-hike wagers and weighed on prices. The metal briefly touched $4,323.78 during Thursday's session before recovering, according to Reuters.

The contrast with the prior week is striking. After Fed Governor Christopher Waller signaled roughly a week ago that he would back unchanged rates if inflation pressure eased, bullion spiked. Since then it has given back 2.5%, a vivid illustration of how quickly market expectations can flip. Every new US economic release now shifts the outlook for next week's Fed meeting — and with it, the direction of the metal. Rate-hike expectations and a firming dollar are acting as a double brake on prices.

Charts Flash Warning Signs

Technically, the picture has deteriorated. Gold now trades about 4.4% below its 200-day moving average of $4,517.26, a sign that the medium-term uptrend has at least been dented. The gap to its 52-week high remains wide: the metal sits 23% below the January peak of $5,598.58.

For investors, that translates into a stretch of heightened uncertainty. The coming Fed meeting is likely to set the tone. If a hike materializes as expected, downward pressure could persist. Should the central bank prove more cautious than feared, a swift rebound is not out of the question — as the rally after Waller's remarks demonstrated.

Central Banks Provide the Counterweight

While short-term rate expectations weigh on prices, sovereign buying continues to supply a stabilizing force. According to the World Gold Council, central banks purchased a net 288.9 tonnes in the second quarter — a 62% increase from a year earlier and a record for any second quarter.

Poland's central bank was the largest single buyer at 51 tonnes, lifting its reserves to 632 tonnes, while China's central bank added 33 tonnes.

Total demand including over-the-counter transactions held steady at 1,269 tonnes quarter-on-quarter, while first-half demand reached 2,522 tonnes, up 2% and a record $380 billion in value.

Gold ETFs moved in the opposite direction, posting outflows of 45 tonnes, driven by weaker prices, rising inflation and rate expectations in North America, and a stronger dollar. In India, a 9% increase in the import duty further dampened demand, compounded by the prime minister's appeal to limit gold purchases.

A World Gold Council survey of 74 central banks found that 45% plan to add to their gold holdings over the coming year — the highest share since 2018, as Bloomberg reported. That structural demand should underpin prices even when short-term rate decisions generate headwinds.

Supply-Side Signals

On the supply front, South Africa reported a 6.2% year-on-year increase in June production, reversing declines in April and May. Analyst Paul Manalo of S&P Global expects global gold supply to peak at 110 million ounces in 2026 before slipping to 103 million ounces by 2028 — a signal of a tighter market in the medium term that could lend additional support to prices in the years ahead.