Gold prices fell to their lowest level in a week on Monday before recovering slightly, as Iran's threat of retaliation over the U.S. seizure of an Iranian cargo ship boosted the dollar and oil prices.
Spot gold dropped 0.5% to $4,804.44 per ounce as of 9:23 a.m. EDT (1323 GMT), after hitting its lowest price since April 13 earlier in the session. U.S. gold futures for June delivery fell 1.1% to $4,824.60.
According to Reuters, the U.S. dollar (.DXY) opened a new tab and rose to its highest level in a week before paring gains, as renewed U.S.-Iran tensions created market uncertainty about the chances of a peace deal. Yields on 10-year U.S. Treasury bonds increased, raising the cost of holding non-yielding gold bars.
"The situation in the Middle East has intensified again, shifting our outlook for gold slightly downward, amid rising risks of another significant spike in oil prices, which could result in higher dollar and bond yields," said Fawad Razaqzada, a market analyst at City Index and FOREX.com.
A ceasefire between the U.S. and Iran appeared at risk on Monday following the seizure of the cargo ship. Oil prices rose by about 5% due to fears that the ceasefire would break down, while flows through the Strait of Hormuz remained largely blocked.
Although gold is considered a hedge against inflation, demand for this non-yielding asset tends to shrink when global interest rates are high. Rates could remain higher for longer as a result of increased inflation due to the war in the Middle East.