Gold prices dipped on Monday as an escalation in the Middle East war pushed Brent crude above $90 a barrel, heightening inflation concerns after many U.S. Federal Reserve policymakers signaled that interest rate hikes may be needed to curb price pressures. Spot gold was down 0.2% at $4,006.74 per ounce. U.S. gold futures for August delivery slipped 0.1% to $4,015.90.

"Gold remains negatively correlated to oil prices, with market participants closely tracking developments in the Middle East," UBS analyst Giovanni Staunovo said. U.S. forces hit Iran for a ninth consecutive day as concerns grew over shipping through the Strait of Hormuz after Iran said two oil tankers had exploded and been immobilised. Oil prices pared gains after rising to an over one-month high earlier in the session.

Elevated oil prices stoke inflation fears and add to bets of higher-for-longer interest rates. While gold is typically seen as an inflation hedge, high interest rates tend to diminish the appeal of the non-yielding asset. Cleveland Fed President Beth Hammack added her voice to a growing chorus of policymakers arguing interest rates may need to rise to beat back persistent inflation. Traders are now pricing an 80% chance of a December interest-rate hike, versus 73% last week, according to the CME Fed Watch tool.

"We expect a weaker dollar to support gold prices in 6-12 months, with the yellow metal expected to move again above the $5,000/oz mark, " Staunovo said.