Gold held a sharp decline as the deadlock between the US and Iran over the Strait of Hormuz continued to keep energy costs elevated and maintained pressure on the Federal Reserve to hike interest rates. Bullion was trading around $4,120 an ounce, after tumbling 4% on Monday to a seven-week low. Oil extended gains, after Iranian officials privately expressed pessimism about reaching a deal to end hostilities with Washington before US midterm elections in November, in the wake of President Donald Trump rejecting their latest proposal to reopen the critical waterway in seven days.

The selloff in the US bond market deepened on Monday after Trump’s rejection, which threatens to prolong the war’s energy shock. The decline pushed Treasury yields higher across maturities, with the benchmark 10-year rate rising to a fresh 19-year high. This undermines the case for holding a non-yielding asset like bullion.

The bond divestment building since the US-Iran conflict erupted in late February has accelerated over the past month, injecting new risks into the economy by driving up borrowing costs. The Trump administration has tried to ease it by increasing buybacks of longer-dated bonds, only to see rates keep pushing higher. Gold is down around 7% in September, even after touching $4,510 an ounce early in the month, after the Fed delivered its first rate rise since 2023 to combat sticky US inflation and flagged the possibility of more.

High energy prices are adding pressure for more increases, with investors currently seeing the probability of a hike in October at around 70%.