Gold drops 2% to $4,448 as Middle East tensions fuel dollar strength

Spot gold fell 2.0% to $4,448.64 an ounce on Monday, extending its decline as renewed US-Iran hostilities pushed the dollar higher.

"The optimism surrounding negotiations between the US and Iran aimed at ending the standoff in the Strait of Hormuz faded over the weekend," Ricardo Evangelista, an analyst at ActivTrades, said. "As a result, energy prices rebounded, reviving inflation concerns and reinforcing hawkish Federal Reserve expectations."

The decline accelerated after the US military struck Iranian sites near the Strait of Hormuz, sinking two Islamic Revolutionary Guard Corps vessels, according to a Wall Street Journal report. Iran responded by launching missiles toward US aircraft. Brent crude rose 2.4% to $98.39 a barrel, reviving inflation concerns and reinforcing expectations that the Federal Reserve will keep interest rates higher for longer. Gold has now fallen 0.9% in May, its fourth consecutive monthly decline.

The selloff challenges gold's safe-haven narrative as the metal moved in the opposite direction of traditional hedges during a live kinetic conflict. Traders are now pricing in a 40% chance of a quarter-point Fed rate hike in December, according to CME Group's FedWatch tool, a scenario that historically weighs on non-yielding assets like gold.

The dollar edged higher, making greenback-priced bullion more expensive for holders of other currencies. Gold futures for August delivery fell 1.4% to $4,528.90.

The latest escalation marks a setback for diplomatic efforts to reopen the Strait of Hormuz, where the US and Iran had reportedly agreed in principle to a deal over the weekend. US Secretary of State Marco Rubio said negotiations could "take a few days," adding that the strait would eventually reopen "one way or the other."

Gold's one-year gain has narrowed to 38%, down from a peak of 95.6% on Jan. 29, as the higher-for-longer rate environment and a strengthening dollar have eroded momentum. The metal now trades roughly 3% below its recent two-week high of $4,575.20 reached on Friday.

A host of Fed board members are scheduled to speak this week, while the ISM manufacturing survey and May payrolls report are due Friday — data releases that could reshape expectations for the path of monetary policy.

This article is for informational purposes only and does not constitute investment advice.