Gold prices fell on Monday as escalating tensions in the Middle East heightened inflation concerns and reinforced expectations that central banks may keep monetary policy tighter for longer.
Spot gold was down 0.4% at $4,517.37 per ounce after hitting a two-week high on Friday. U.S. gold futures fell 1.9% to settle at $4,506.30.
The U.S. dollar firmed, making metals priced in the currency more expensive for holders of other currencies. "Expectations for interest rates to remain higher for longer are likely to keep gold under pressure, unless bond yields stop rising and rates begin to stabilise or trend lower," said Jim Wyckoff, a market analyst at American Gold Exchange.
Iran said it had attacked a U.S. air base following weekend U.S. strikes on Iranian military targets. Iran's Tasnim news agency said that Iran's negotiating team said it was stopping exchanging messages with the United States through mediators.
Oil extended gains, adding to inflation fears linked to the Iran conflict, which could lead central banks to raise interest rates to curb rising price pressures.
Traders have factored in a roughly a 56% chance of at least one U.S. rate hike by the year-end, according to CME Group's FedWatch tool.
Although gold is often regarded as an inflation hedge, its attractiveness tends to fade in a high-interest-rate environment because it does not generate yield.
Market participants will turn their attention to a series of U.S. jobs data releases due this week, along with remarks from Federal Reserve officials. "Once the geopolitical situation stabilises and the energy shock begins to fade, we expect investors to refocus on the structural themes that have underpinned the bull market in gold over recent years," Saxo Bank analyst Ole Hansen said.
He added that central banks are expected to remain net buyers over the coming year.