Gold prices held on to modest gains in European trading on Friday, but were still nursing deep weekly losses, as the U.S.-Israel war on Iran raised inflation expectations and dented bets on interest rate cuts. 

The yellow metal had tumbled on Thursday after several major central banks flagged caution over the inflationary effects of the Iran war. This in turn fueled expectations for no interest rate cuts in the near-term – a scenario that bodes poorly for precious metals. 

Spot gold rose 0.1% to $4,657.00 an ounce by 06:45 ET (10:45 GMT), while gold futures advanced 1.1% to $4,658.41/oz.

Bullion took some relief from a drop in the dollar, which was headed for its first weekly loss in three. The greenback was outpaced by other major developed world currencies after several central banks flagged plans for interest rate hikes in the face of rising energy prices. 

Gold heads for deep weekly losses

Spot gold was trading down roughly 8% this week – its worst weekly drop since early-2020. Despite being widely regarded as a safe haven asset, gold has largely underperformed since the onset of the Iran war in late-February. 

Safe haven flows into gold were vastly overshadowed by a spike in the dollar and U.S. Treasury yields, as markets fretted over the inflationary effects of the conflict.

Oil prices shot up to near four-year highs this week, fueled in large part by strikes on Middle Eastern energy infrastructure. The spike in oil saw a swathe of major global central banks flag caution over potential energy-driven inflation.

The Reserve Bank of Australia hiked interest rates, while the Federal Reserve, European Central Bank, Swiss National Bank and Bank of Japan all left rates steady and warned of few changes in the coming months.

“Growing concerns over the global economic fallout from the conflict are weighing on risk appetite. The spike in oil prices has added to inflation concerns, reducing the likelihood of a near-term U.S. rate cut and creating headwinds for both industrial and precious metals,” analysts at ING said in a note.