Gold trims losses after US PPI data, focus on Middle East tensions

Gold prices trimmed losses on Wednesday after U.S. producer prices unexpectedly fell in June, although worries about inflation and elevated interest rates remained due to escalating tensions in the Middle East.

Spot gold was down 0.2% at $4,047.27 per ounce by 11:35 a.m. EDT (1535 GMT) after falling nearly 1% earlier in the session. U.S gold futures fell 0.4% to $4,053.70.

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"Gold has pared losses from earlier this morning as PPI came in lower than expected and eased some of those concerns about the Fed having multiple interest rate hikes this year," said Phillip Streible, chief market strategist at Blue Line Futures. The Producer Price Index for final demand dropped 0.3% last month after a downwardly revised 0.6% increase in May, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast an unchanged PPI after a previously reported 1.1% advance in May.

Traders see about a 10.2% chance of a rate increase at the Federal Reserve's July meeting, versus 16.6% before the data, CME FedWatch Tool's data showed. U.S. consumer inflation also slowed more than expected in June, data on Tuesday showed. Meanwhile, the U.S. said it has begun a new wave of strikes against Iran after re-imposing a naval blockade of Iranian ports, while Iran threatened to shut off more regional energy exports. Oil extended gains on Wednesday.

"Recent developments revolving around the Strait of Hormuz have simply revived fears around untamed prices pressures. Should tensions escalate further, resulting in higher oil prices, this could expose gold to downside risks," said Lukman Otunuga, senior research analyst at FXTM.

"A solid breakdown below this point may open the doors toward $3,950 and $3,000. Should $4,000 prove reliable support, prices may rebound back toward $4,100."

Higher fuel costs could keep inflationary pressures persistent, prompting central banks to hold rates at elevated levels for longer and weighing on gold's appeal as a non-yielding asset.

Spot silver dipped 1.6% to $57.67, while platinum gained 0.2% to $1,634.13. Palladium fell 0.8% to $1,294.25.