London: Gold prices fell on Thursday, reversing earlier gains as the US dollar strengthened and bond yields rose, with markets bracing for key US inflation data that could influence the Federal Reserve's next interest rate decision.
Spot gold fell 0.4 percent to $4,385.40 an ounce by 1125 GMT, while US gold futures fell 0.7 percent to $4,427.80 an ounce.
The reversal came after gold initially gained as the dollar weakened. The recovery in the US currency and rise in bond yields later put pressure on the precious metal.
Gold is priced internationally in US dollars, so a stronger dollar can make it more expensive for buyers using other currencies. Higher bond yields can also reduce gold's appeal because the metal does not pay interest.
Investors are now closely watching US inflation data for signs of how the Federal Reserve may act at its policy meeting on September 15 and 16.
The US Producer Price Index for August was scheduled for release on Thursday, while the Consumer Price Index for August is due on Friday. The figures could influence expectations for US interest rates.
A majority of economists surveyed by Reuters expect the Federal Reserve to leave interest rates unchanged at its September meeting. However, traders were pricing about a 62 percent chance of a rate increase next week, showing a clear difference between economist expectations and market pricing.
Oil prices are adding to the uncertainty. Brent crude was trading above $100 a barrel on Thursday as the continuing conflict between the United States and Iran raised concerns about further disruption to oil supplies.
Brent crude reached $102.15 a barrel, while US West Texas Intermediate crude rose to $97.50. Higher energy prices could add to inflation pressure and make it harder for central banks to lower interest rates.
At the same time, geopolitical tensions can support demand for gold because investors often turn to the precious metal during periods of political and financial uncertainty.
These competing forces are leaving gold sensitive to every change in the dollar, bond yields, oil prices and interest rate expectations.
The developments are also important for India, where the rupee has weakened against the US dollar. The Indian currency ended Thursday at 95.44 per dollar, marking its third consecutive daily decline.
A weaker rupee can make imported gold more expensive in India even when international gold prices are falling. Domestic gold prices are therefore affected by both global gold prices and movements in the rupee.
Gold futures on the Multi Commodity Exchange were trading around Rs 1.53 lakh per 10 grams on Thursday. The futures price can differ from retail gold prices because of differences in purity, taxes, premiums and other charges.
Investors will next focus on the US consumer inflation data due on Friday, along with movements in the dollar and bond yields. Oil prices and developments in the conflict involving Iran will also remain important.
The Federal Reserve's September meeting will be the next major test for gold as markets assess whether inflation pressures are strong enough to keep US interest rates higher for longer.
For now, gold remains caught between safe haven demand linked to geopolitical tensions and pressure from higher yields, oil prices and changing expectations for US monetary policy.