With the Federal Reserve's interest rate decision approaching, international gold prices fell to a one-week low on Tuesday. Spot gold dipped to $4011.54 per ounce before closing at $4028.42, recording a daily decline of 1.2%.

Meanwhile, the US Dollar Index remained near a one-month high. Oil prices experienced sharp volatility due to conflicting signals from US-Iran dialogue rumors and renewed conflict. Bond yields edged lower but stayed in a generally elevated range. The gold market is at a crossroads where multiple forces are fiercely competing: on one side, the heavy pressure from a strong dollar and expectations of further rate hikes; on the other, support from geopolitical uncertainty and long-term inflation hedging demand that has not yet fully dissipated. This tug-of-war around gold prices is far from over.

On Wednesday during early Asian trade, spot gold traded in a narrow range at lower levels, currently around $4017.38 per ounce.

Strong Dollar and Hawkish Expectations Combine to Pressure Gold

The primary driver of Tuesday's decline in gold prices was the persistent strength of the US dollar. The Dollar Index edged down 0.12% to 101.41, but remains close to the late-June high of 101.80, making dollar-denominated gold more expensive for buyers using other currencies. Market participants generally attribute this to a significant reassessment of the Fed's policy path in recent months.

Since the escalation of US-Israeli military actions against Iran, volatile energy prices have fueled inflation concerns. Hawkish statements from newly appointed Fed Chair Warsh have further reinforced expectations that interest rates will remain higher for longer. David Meger, Director of Metals Trading at High Ridge Futures, noted that persistently high energy prices remain a key inflation concern for Fed members, and the market's expected hawkish stance has directly pushed up rate hike expectations and the dollar, putting significant pressure on gold.

The pressure from the interest rate environment on gold is clear. As a non-yielding asset, gold often loses its appeal during periods of rising real interest rates. Current trader pricing shows approximately a 71% probability that the Fed will hold rates steady on Wednesday, but the probability of a rate hike in September has climbed to around 75%. Some market views even suggest a near 30% chance of a 25-basis-point hike this week.

Commerzbank has sharply lowered its year-end gold price target by $300 to $4500 per ounce, warning that without a reversal in interest rate expectations, it will be difficult for gold ETF investors to return sustainably, and a meaningful price rebound is unlikely. Since the conflict began in late February, gold prices have fallen by approximately 24%, reflecting the market's pricing of a "higher rates, longer period" scenario.

Bond market dynamics also support this assessment. Although falling oil prices pushed 10-year and 30-year Treasury yields slightly lower for a third consecutive day, with the 10-year yield touching a one-week low near 4.588%, they remain in multi-month high territory. While the two-year yield has fallen, it is on track to rise for a fifth consecutive month. Regarding inflation expectations, the 5-year and 10-year TIPS breakeven inflation rates are around 2.17% and 2.20%, respectively, indicating that the market's long-term inflation expectations are relatively anchored. However, the shadow of short-term energy disruptions has not completely faded. This combination forms the macro backdrop for gold's short-term pressure.

Fluctuating Middle East Situation and Oil Price Swings Challenge Gold's Geopolitical Premium

If the dollar and interest rates are the dominant forces pressuring gold, the fluctuating geopolitical situation in the Middle East is a potential variable that the gold market cannot ignore. US President Donald Trump stated that Washington and Iran are having "good talks" and a solution might be reached, but also warned that if negotiations fail, the US would resume military strikes, potentially targeting reinforced underground facilities near Tehran. Iran, however, denies seeking to resume talks and warns that any country or company accepting the US use of frozen Iranian assets for "compensation" will have its ships banned from the Strait of Hormuz. A proposal from Oman to jointly manage the Strait of Hormuz and collect voluntary passage fees, while supported by some Gulf states, has not quickly resolved the deadlock.

The sharp volatility in oil prices is a direct reflection of this game. After Trump called off airstrikes and signaled dialogue, Brent crude and US crude futures fell sharply for several consecutive sessions, with a cumulative decline of nearly 20% over the past three trading days. Brent crude for September delivery fell over 3% on Tuesday to near a two-week low. The drop in oil prices alleviated some inflation concerns and provided room for a slight decline in bond yields.

However, the fragility of the situation quickly became apparent: Iran launched ballistic missiles at a US military base in Jordan, marking the end of a brief informal ceasefire. In response, crude oil markets jumped on Wednesday, with US crude surging over $3 in early trade, a gain of nearly 5%, erasing all of Tuesday's losses. This alternating pattern of "dialogue and conflict" keeps gold's geopolitical premium in a dilemma—an escalation of conflict could instantly ignite safe-haven buying, while any substantive sign of a detente would quickly weaken this support. More often, however, conflict escalation intensifies inflation pressure and boosts expectations for Fed rate hikes, while the dollar also attracts safe-haven buying, thereby pressuring gold prices. When the situation eases, gold prices tend to get a short-term rebound opportunity.

From a longer-term perspective, the shipping crisis in the Strait of Hormuz remains a sword of Damocles hanging over the global energy and commodity markets. Before the conflict, the strait carried about one-fifth of the world's oil and liquefied natural gas transport. Iran's current situation of only allowing its own ships to pass has had a profound impact on supply chains. The Omani proposal attempts to find a way out through voluntary fees and joint management, similar to the existing mechanism in the Strait of Malacca, but significant differences remain between the US and Iran over the legality of the fees and control issues. As a traditional safe-haven asset, gold should be supported in this highly uncertain geopolitical environment, but its weak performance due to pressure from interest rates and the dollar reflects the market's high recognition of the "real interest rate dominance" logic.

Fed Decision Becomes Short-Term Catalyst, Medium-Term Narrative for Gold Still Uncertain

Investors are now most focused on the conclusion of the Fed's two-day policy meeting on Wednesday and Chair Warsh's subsequent speech. Regardless of the outcome, the dollar appears to be in a relatively favorable position: a direct rate hike would provide a clear boost, while a hawkish hold would simply delay the rate hike expectation until September. However, some analysts caution that speculative short positions on the dollar are already at high levels, and any dovish signal could trigger a massive unwinding of those positions. The US June personal consumption expenditures (PCE) data, scheduled for release on Thursday, will provide further clues for the monetary policy path.

For gold, the short-term trajectory is highly dependent on the signals from the Fed. If the decision and speech reinforce the "higher for longer" interest rate expectation, gold prices could test further support levels. Conversely, if there is any moderate tone or a downplaying of the energy shock impact, gold might see a technical rebound opportunity.

In the medium to long term, the narrative for gold has not been completely invalidated. Despite the recent significant decline, its attributes as a long-term inflation hedge and geopolitical safe haven remain. If there is a substantive de-escalation in the Middle East situation, a sustained drop in oil prices leading to a decline in inflation expectations, the upward pressure on real interest rates could ease, potentially triggering a real return of gold ETF funds. Conversely, if conflict reignites and energy prices surge again, gold's safe-haven properties will be re-priced by the market.

Overall, the current drop in gold prices to a one-week low is a stage result of the interplay between a strong dollar, rate hike expectations, and the geopolitical premium. It is not the end of the trend. The Fed's decision will be a key short-term inflection point for sentiment, while the progress of Middle East negotiations and the ultimate direction of oil prices will determine whether the medium-term narrative for gold can turn positive again. With uncertainty still high, market participants need to keep a close watch on both the interest rate path and the geopolitical temperature gauge, as an unexpected change on either side could quickly rewrite the trajectory of gold.