Oil Rally Lifts Fed Hike Expectations, Pressuring Gold as Markets Price a 77% Chance of a September Increase

• Spot gold fell 0.6% to $4,103.39 per ounce, retreating from the two-week high of $4,165.87. 
• Brent-linked crude rose more than 1.5% to a six-week high after new US strikes on Iran and Houthi attacks on Red Sea oil tankers. 
• Two-year US Treasury yields reached a 17-month high as futures markets priced a 77% probability of a September Fed rate increase. 
• Physically backed gold ETFs recorded $8.9 billion of outflows in June, reducing global assets under management 13% to $526 billion and holdings by 74 tonnes to 4,047 tonnes. 
• North American funds lost $7.7 billion in H1, their weakest first half since 2013, while Asian funds attracted a record $12 billion, highlighting sharply different regional demand trends.

Iran Strikes Lift Oil Prices & Raise Inflation Pressure on Gold

Spot gold slipped 0.6% to $4,103.39 per ounce, retreating from the two-week high of $4,165.87. US gold futures for August delivery fell 1.1% to $4,106.40. The decline followed a more than 1.5% rise in Brent-linked crude to a six-week high after new US strikes on Iran, which increased inflation expectations. 

Higher oil prices increased inflation expectations, pushing two-year US Treasury yields to a 17-month high as markets anticipated tighter Fed policy. Higher real yields raise the opportunity cost of holding non-yielding bullion. Jigar Trivedi, senior research analyst at IndusInd Securities, said higher oil prices offset support from a weaker US dollar by reinforcing expectations for higher interest rates.

Oil-Driven Inflation Raises Pressure on Fed and ECB Policy

The US carried out a 12th consecutive night of strikes against Iran while Yemen's Iran-aligned Houthis claimed responsibility for attacks on Red Sea oil tankers, pushing Brent-linked crude more than 1.5% higher to a six-week high. 

Higher energy prices lifted inflation expectations, strengthening expectations that central banks will keep interest rates elevated, weighing on gold. Markets expect the Fed and ECB to hold rates at their next meetings, though futures price a 77% probability of a September Fed rate increase and the ECB has left the door open to another hike. Meanwhile, 86% of economists expect the Bank of Japan to raise rates again this year, potentially in October.

Institutional Longs Rise 16% Despite Weaker Gold Prices, Signaling Diverging Investor Conviction

Institutional positioning strengthened despite weaker gold prices, with COMEX net longs rising 16% month over month to 538 tonnes in June, the highest month-end level since January. Large non-managed-money futures positions also increased 16%, while nonreportable positions declined, highlighting stronger institutional buying than retail demand. 

Bear case: higher September hike odds push Treasury yields higher and gold below $4,103.39. 

Bull case: easing tensions with Iran or lower oil prices lift gold above $4,165.87. The next World Gold Council ETF report and the CME FedWatch Tool remain the key indicators for ETF flows and Fed rate expectations.

$5.5 Billion in US ETF Outflows Contrasts With Resilient Asian Gold Demand

Retail selling remained concentrated in the largest US-listed gold ETFs. SPDR Gold Shares recorded $3.19 billion of net outflows in June, while iShares Gold Trust recorded $1.83 billion, together accounting for more than half of North America's $5.54 billion in ETF outflows. Nonreportable futures positions also declined while larger traders increased exposure, highlighting weaker retail sentiment. 

The key question is whether weaker prices reflect higher rate expectations or softer physical demand. Asian demand remained resilient, with Chinese funds recording outflows as stronger domestic equity markets attracted capital, while Indian funds recorded inflows as buyers accumulated at lower prices. The Fed's next policy decision will determine whether markets maintain the current 77% probability of a September rate increase.

77% September Rate Hike Probability Could Lift Treasury Yields and Break Gold Below $4,103

Markets expect the Fed to hold rates while pricing a 77% probability of a September rate increase, keeping gold within its $4,103.39 to $4,165.87 trading range. Global gold ETFs attracted $8.0 billion of net inflows in H1, led by a record $12 billion from Asia. 

A Fed statement that strengthens September hike expectations, or an ECB shift toward tighter policy, could push Treasury yields higher, increasing the opportunity cost of holding non-yielding gold and adding pressure to North American ETFs, which recorded $7.7 billion of outflows in H1, their weakest first half since 2013. The CME FedWatch Tool and the next World Gold Council ETF report remain the key indicators for rate expectations and regional fund flows.