Escalating conflict in the Middle East is sending ripples through global markets, with gold prices dropping sharply as investors brace for higher U.S. interest rates. The precious metal's decline highlights a growing tension between safe-haven demand and the pressure of a strengthening dollar and rising bond yields. Main Developments Spot gold fell 1.5% to $4,001.17 per ounce by 0926 a.m. EDT on Thursday, after hitting an intraday low of 2% earlier. U.S. gold futures slid 1.1% to $4,005.20, reflecting broad selling pressure across the sector. Oil prices climbed over 1% as Iran directed Yemen's Houthis to prepare for closing the Red Sea oil route if the U.S. strikes Iranian power infrastructure. Higher crude costs stoke inflation fears, reinforcing expectations that the Federal Reserve will maintain or even raise interest rates. Read also: Pakistan's Textile Sector Stagnates as Council Pushes PM for Urgent Reforms Traders now see a 56% probability of a September rate hike, according to the CME FedWatch Tool. The benchmark 10-year U.S. Treasury yield drifted higher, while the dollar gained 0.2%, making gold more expensive for overseas buyers. Background Gold's appeal as a non-yielding asset weakens when interest rates rise, as investors seek income from bonds or cash. Recent economic data painted a mixed picture: U.S. consumer inflation slowed in June, and the producer price index declined on Wednesday. Yet persistent energy price gains could override those softer signals. Fed Chair Kevin Warsh this week reiterated his determination to lower inflation without offering specific policy hints, keeping markets uncertain. Why It Matters The gold selloff signals that investors expect the Fed to prioritize fighting inflation over supporting growth, even as some economic indicators soften. Higher rates could slow borrowing and spending, affecting everything from mortgages to corporate investment. Other precious metals followed gold lower: spot silver dropped 2.8% to $56.17, platinum fell 0.9% to $1,658.65, and palladium declined 2.7% to $1,279.25. The broad-based retreat underscores the dollar's strength and the shifting rate outlook. What's Next Markets will watch for any further escalation in the Middle East, which could push oil even higher and amplify rate-hike expectations. The Fed's next policy meeting in September will be pivotal, with the CME FedWatch Tool indicating a 56% chance of a hike. Investors will also parse upcoming economic data for signs that inflation is easing enough to allow the Fed to pause. Until then, gold may remain under pressure from the dual headwinds of a strong dollar and rising yields.