Gold prices edged higher Thursday with the escalating Middle East war supported bullion’s safe-haven appeal.

At 06:05 ET (11:05 GMT), Spot gold traded 0.5% higher at $5,167.00 an ounce, after rising over $5,200/oz earlier in the day. U.S. Gold Futures gained 0.8% to $5,176.35/oz.

The yellow metal gained 1% in the previous session. The rebound followed a near 5% pullback on Tuesday when a stronger dollar weighed on prices.

Gold helped by elevated Middle East tensions

Geopolitical tensions remain elevated after the U.S. sank an Iranian warship in international waters, while Iran continued to fire missiles into several countries across the region and reportedly targeted critical energy infrastructure.

The conflict has deepened fears of a sustained regional war, prompting investors to reduce exposure to risk-sensitive assets and flock to gold, which is traditionally viewed as a hedge against geopolitical instability and market turbulence.

"Looking ahead, gold faces competing macro forces," said analysts at ING, in a note. "The inflationary impact of the Middle East conflict, via sharply higher energy prices, could reinforce expectations of higher interest rates for longer -- a headwind for non‑yielding assets such as gold."

"However, elevated geopolitical uncertainty continues to support a risk premium, helping to underpin prices despite the challenging rates backdrop," they added.

Dollar strength limits gold’s gains

Trader are also keeping an eye on the US Dollar Index, which bounced back Thursday after slipping 0.3% overnight. It posted two consecutive sessions of strong gains at the start of the week.

A stronger greenback makes gold more expensive for holders of other currencies.

“Uncertainty typically supports safe havens, implying upside for gold,” Morgan Stanley strategists led by Amy Gower wrote in a note, but added that recent price action has been “more mixed with USD strength.”

Several forces are currently influencing gold prices simultaneously. These include expectations around Federal Reserve interest-rate cuts, currency movements, geopolitical risk, and market liquidity conditions.

According to the strategists, the recent selling in gold may reflect investors raising cash during periods of market stress rather than a fundamental shift in sentiment.

“We think gold’s underperformance is likely to be temporary if the current situation continues, with recent selling most likely due to the need for liquidity,” the strategists said.

Among other precious metals, silver prices rose 1.6% to $84.53 per ounce, while platinum gained 1% to $2,176.200/oz. 

Benchmark Copper Futures on the London Metal Exchange dropped 1.2% to $12,904.00 a ton and U.S.Copper Futures also fell 1.3% to $5.8308 a pound.