Gold steadies after two-day drop as Iran strikes revive inflation risks

Gold prices stabilized on Monday following a more than 3.5% decline over the prior two days, as heightened U.S.-Iran strikes heightened the risk of energy cost increases. XAU/USD slipped 0.1% to $4,444.36 per ounce, while Gold Futures rose 0.3% to $4,493.25. XAG/USD climbed 0.2% to $66.67 an ounce, and XPT/USD increased 0.4% to $1,802.60.

The U.S. Dollar Index remained unchanged at 99.46. Iran and the U.S. exchanged strikes for the first time in a month, injecting new uncertainty into energy markets. U.S. forces targeted Iranian rocket launchers on an island in the Strait of Hormuz on Sunday, alleging the weapons were intended to deploy mines in the crucial waterway.

Iran subsequently retaliated by striking targets in the United Arab Emirates and Jordan. These recent confrontations highlight the ongoing standoff between Washington and Tehran after six months of conflict. The Strait of Hormuz remains a focal point of tension, with the ongoing conflict disrupting global energy flows. Oil prices surged after posting their biggest gain in three weeks on Monday due to the heightened energy cost risks.

Gold's price movement is influenced by inflation risks, which could prompt the Federal Reserve to maintain or raise interest rates further. This poses a challenge for gold, as it does not generate interest income. With a 60% probability of a 25 basis point Fed rate hike at the September 15-16 meeting according to CME FedWatch, Tony Sycamore, senior market analyst at IG, noted that the $300 price decline from last week's high near $4,697 to Monday's low around $4,397 resulted from a combination of the Federal Reserve Chairman's hawkish Jackson Hole speech and renewed tensions around Hormuz.

Despite the recent pullback, gold delivered nearly 10% gains in August, its strongest monthly gain since January. The August rally gained momentum after the U.S. Treasury announced plans to increase purchases of longer-dated government debt, lowering borrowing costs and weakening the dollar, while also reigniting concerns over U.S. sovereign debt and potential currency devaluation.

This debasement narrative has driven gold's roughly 65% rally in 2025 as investors sought protection from soaring government deficits and currency weakness. However, the recent hawkish shift from the Fed has disrupted this momentum, causing gold to dip below its 200-day moving average near $4,526 and causing some short-term technical damage.