Gold pared

some of its early gains as traders weighed the prospect of the

Federal Reserve

raising interest rates to tame inflation spurred by the

conflict in the Middle East

.

Bullion slipped

as much as 0.3 per cent before trading about one per cent higher. Prices earlier climbed to a one-month high on haven demand. President Donald Trump said the United States would keep up its military offensive against Iran for as long as it takes, outlining for the first time a set of four objectives he hopes to accomplish toward reducing the threat he said is

posed by Tehran

.

Silver and palladium fell

.

The risk-off mood on Monday sent global stocks lower before they erased losses. The dollar surged and U.S. Treasuries fell on concerns over inflationary pressure from higher oil prices and rising government spending. Oil soared the most in four years.

Gold’s gains were capped as traders started to factor in higher inflation risks, according to Frank Monkam, head of cross-asset macro strategy and trading at Buffalo Bayou Commodities. That may force the Federal Reserve and its global peers to hike interest rates to contain rising price pressures. In fact, swap traders have already scaled back wagers on the scope of rate cuts. Higher rates are typically negative for non-yielding bullion.

Still, wider geopolitical tensions and U.S. President Donald Trump’s upheaval of international relations and trade have underpinned a long-running rally for gold, which has also been supported by elevated central-bank buying and investor fears of inflation and currency debasement.

“Gold is set to benefit from geopolitical instability, less risk appetite and inflation concerns amid skyrocketing energy costs,” analysts at TD Securities wrote in a Sunday note. Speculators, who have been pulling back from the long gold trade in recent weeks, “could see the developments in the Middle East as an opportunity to get back in,” TD said.

Bullion has gained 23 per cent so far this year, despite an abrupt pullback from a record high above US$5,595 an ounce at the end of January.

Tehran’s retaliatory strikes include the United Arab Emirates — a critical artery in the global gold trade. The UAE supplies bullion to buyers in China and India and serves as a conduit for shipments from London, the world’s dominant spot trading hub.

The country partially closed its airspace and suspended flights in Dubai in response to the attacks, temporarily halting the flow of metal.

One trader said Monday was spent rushing to reroute consignments that had been scheduled to transit through Dubai en-route to their final destination. Gold is typically transported in the cargo holds of passenger aircraft, of which there are many on the busy London-Dubai route.

While the disruptions are only temporary, a longer-term freeze on flights from UAE could pose a more serious challenge to the availability of metal for traders in India and other markets in Asia. At the outbreak of the pandemic in 2020, shutdowns of flights

updended global markets

, as traders were unable to quickly fly metal between trading hubs to take advantage of arbitrage opportunities.

Much of the premium associated with ongoing geopolitical tensions is already priced-in for oil, Manish Kabra, head of U.S. equity strategy at Societe Generale SA said on Monday. “Gold remains our most preferred hedge — a disciplined diversifier that tends to extend its performance during oil‑shock,” Kabra said.

Even ahead of the war with Iran, Trump had adopted an increasingly aggressive foreign policy. U.S. troops seized Venezuela’s then-president Nicolás Maduro in January and the administration made threats to annex Greenland. With Washington amassing its biggest military deployment in the Middle East since the Iraq War in 2003, bullion posted its seventh consecutive monthly gain in February — the longest streak since 1973.

Spot gold rose 0.89 per cent to US$5,325.69 an ounce as of 2:46 p.m. in New York. Silver dropped 4.9 per cent to US$89.23. Palladium fell 0.40 per cent. The Bloomberg Dollar Spot Index advanced 0.6 per cent.

Bloomberg.com

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