Bullion prices face significant selling pressure after recording a drop of about 8% since Monday's trading amid the market starting to see confidence in the USD currency despite the prospect of a US rate cut becoming bleaker.
At 8.40 am, gold prices were at $5,217, up 0.80% since it opened in early trading Wednesday in the Asian session.
Concerns over inflationary pressures have peaked again as oil prices rose, thus changing market expectations for US monetary policy.
The surge in energy commodities has caused investors to reduce the possibility of a rate cut by the Federal Reserve (Fed) in the near future.
The US dollar surged to a three-month high following the change in sentiment. The strengthening dollar makes USD-denominated gold more expensive for international buyers, thus depressing the price of the precious metal.
The market now expects the Fed to keep interest rates unchanged at least until the summer.
This expectation is in contrast to the stance of US President Donald Trump, who continues to push for lower interest rates to support economic growth.
The pressure on gold is also driven by the shift in fund flows towards liquidity and cash assets. The strong dollar and rising US bond yields reduce the appeal of gold, which does not offer interest returns.
This situation contributes to the decline in gold prices in the short term.
However, the potential for gold's decline is seen as limited due to increased geopolitical risks that continue to support demand for safe assets.
Reports state that all American diplomatic personnel have been identified as safe after the drone incident in the US consulate area in Dubai. Previously, the US closed several embassies in the Middle East including Saudi Arabia, Kuwait and Lebanon and issued a travel warning to its citizens.
In a separate development, the Israeli army launched a new ground operation in southern Lebanon to target Hezbollah, in addition to intensifying air strikes.
The rising tension in the region has the potential to revive the 'safe haven' trend, thus limiting the selling pressure on gold in the near term.
