Trading floors in recent days have been sensitive to the worsening geopolitical agenda and to rate expectations. On Tuesday, gold posted its biggest drop in three weeks. High oil prices are adding pressure: the market is pricing in higher inflation and reassessing how the Middle East conflict might affect monetary policy.

At 07:46 GMT, the spot price of gold was down 1.1% at $4,628 per ounce — the lowest level since April 7. US June gold futures also fell 1.1% to $4,642.90.

This is an important signal for traders: gold normally benefits from a rising geopolitical premium and a weak dollar, but this time forces linked to the prospect of unchanged or tighter rates outweigh those supports.

President Trump and his national security advisers did not back an Iranian proposal related to reopening the Strait of Hormuz. According to the Wall Street Journal, the initiative could have delayed talks on Iran's nuclear program, but the White House rejected it. A response is expected soon.

What was the proposal? Axios previously reported that Iran was prepared to reopen the Strait of Hormuz, provided Washington lifted the blockade on ships bound for and from Iranian ports. Due to the conflict, daily transit through this strategically vital route has fallen to near zero, hitting flows of crude oil, natural gas and refined products — and helping to push oil prices higher on Tuesday.

Mark Loeffert, a trader at Heraeus Precious Metals, wrote in a research note that an open-ended extension of the ceasefire while the Hormuz blockade remains in place "increases uncertainty in the market." His scenario suggests that a mix of economic stagnation and rising prices could, over time, create conditions for a long-term gold rally.

At the same time, the current dynamics show the opposite side: geopolitical tension has raised energy supply risks, boosting inflationary fears and increasing the likelihood that central banks will keep rates unchanged or even hike. As a result, non-yielding assets suffer — gold has lost about 12% since the conflict began in late February.

Edward Meir of Marex noted: "If an agreement — or even an interim deal — is struck between the US and Iran, the dollar would likely weaken, which could support gold."

On the other hand, rising oil prices can accelerate inflation by raising transport and production costs, thereby increasing the chance of higher interest rates. Although gold is often seen as an inflation hedge, higher rates make yield-bearing alternatives more attractive and reduce demand for the non-yielding metal.

This week, the key driver will be central bank decisions. Market participants expect the Fed to leave rates unchanged on Wednesday after its two-day meeting.

Additional attention is focused on other central banks:

1. The Bank of Japan on Tuesday left its policy rate unchanged at 0.75%, but dissenting votes signal a high probability of a rate hike in June and reflect concern about inflationary pressure from the Middle East conflict.
2. Decisions from the European Central Bank, the Bank of England and the Bank of Canada are also awaited.

For traders, the outcome is a mix of two opposing forces: geopolitical risk and potential dollar weakness may support gold over the medium term, but in the short term, inflation and rate expectations dominate and make non-yielding metals less attractive.