Gold prices are on track for a third consecutive weekly gain, as hopes for a diplomatic resolution to the conflict involving Iran and ongoing central bank purchases offset persistent inflation risks.

During Friday's Asian trading session, spot gold held steady near $2,360 per ounce, having risen close to 2% since the start of the week.

With critical issues in the Middle East conflict unresolved, market attention has shifted to weekend negotiations in Islamabad, where a US delegation led by Vice President JD Vance is scheduled to meet with Iranian officials. Traders are also awaiting the US inflation report due later on Friday.

Former US President Donald Trump stated he was "optimistic" about reaching a deal to end the six-week conflict but later threatened Iran, warning of action if Iran imposed fees on ships passing through the Strait of Hormuz. Israeli airstrikes in Lebanon also jeopardized a fragile ceasefire agreement reached earlier in the week.

Oil prices are poised for a weekly decline, while equities have rebounded. The US Dollar Index has fallen 1.3% this week, providing support for dollar-denominated gold.

However, since the conflict escalated in late February, gold prices have still fallen nearly 10% overall, as its safe-haven appeal has diminished amid investor needs to cover losses in other assets.

The energy supply shock triggered by the conflict has also intensified inflation risks, leading traders to bet that central banks may delay interest rate cuts or even consider hikes. This poses a challenge for non-yielding gold, which typically performs better in low interest rate environments.

"Any forecast starts with a judgment on the conflict," said Kyle Rodda, an analyst at Capital.com in Melbourne. "If a ceasefire holds, a peace deal is reached, and future inflation is contained, gold will recover. But if the situation deteriorates—which is a real possibility—gold still faces significant downside risks."

A report from the US Bureau of Economic Analysis on Thursday showed that US consumer spending barely grew in February, prior to the conflict's escalation, against a backdrop of persistent inflation. More current data will be reflected in Friday's Consumer Price Index (CPI) report for March. Economists surveyed expect the data to show the largest monthly increase since June 2022.

Contrasting expectations for higher borrowing costs, a prolonged conflict could also slow economic growth, impact the labor market, and prompt interest rate cuts. Minutes from the Federal Reserve's March meeting indicated officials are weighing these two-sided risks from the conflict.

Meanwhile, signs that some of the world's largest gold buyers continue to increase their reserves are providing underlying support for gold prices. The head of Poland's central bank stated it maintains its goal of raising gold reserves to 700 tons.