Gold held steady on Friday, but was on track for its ​biggest weekly loss in six ​as escalating U.S.-Iran tensions drove energy prices higher, fuelling inflation fears ​and reinforcing expectations of U.S. interest rate hikes. Spot gold was unchanged at $3,970.35 per ounce, holding near its lowest level since July 1. Prices are down more than ‌3 per cent so far ⁠for ⁠the week. U.S. gold futures for August delivery fell 0.5 per cent to $3,973.10.

Gold price has fallen about 25 per cent since the U.S.-backed war ​with Iran began in late February, pressured by expectations that ​war-driven inflation could keep interest rates higher for longer. While gold is seen as a hedge against inflation, higher rates typically weigh on the non-yielding metal.

Why is Gold Price Down?

"When ​prices go down there, there's bound to be some short sellers who take ​profit," said Fawad Razaqzada, a market analyst at Forex.com. "If oil were to go higher, it will continue to weigh on gold because that will ​boost inflation expectations, which in turn means that ⁠interest rates ‌will be higher and people would be attracted to ​buying bonds ​instead," Razaqzada added.

Expectations of higher interest rates dent gold's ⁠appeal as it is a non-yielding asset. The U.S. dollar rose for a second ​straight session, making bullion more expensive for overseas buyers.

"The main drivers of the selloff in gold ​have been a stronger U.S. dollar and higher global inflation fears, which have sent global interest rates higher," said Chris Gaffney, president of world markets at EverBank.

The U.S. ​escalated its renewed bombing campaign on Iran, hitting bridges ⁠and an airport. ‌Tehran responded with strikes on U.S. bases across the Middle ​East. Brent crude ​oil prices were up more than 14 per cent for the week following ⁠the attacks.

"Recent data have decreased the probability of a rate hike at the next FOMC meeting, but global interest rates continue to climb and the recent increase in oil prices could drive ‌the Federal Reserve to take a more hawkish stance on U.S. interest rate policy," Gaffney said.

Traders are now pricing in about a 53.3 per cent ​chance of a ​U.S. interest rate hike ⁠in September, according to the CME FedWatch Tool.

On Thursday, Fed Vice Chair Philip Jefferson suggested he would be open to raising rates if there was no near-term improvement ​in inflation.

However, "gold's share in private portfolios remains low, and recent geopolitical developments, including Iran and broader tensions, may accelerate diversification beyond central banks to private investors," Goldman Sachs said in a note.

Among other metals, spot silver fell 0.8 per cent to $55.05, platinum dropped 3.3 per cent to $1,563.49, and palladium slipped 1.5 per cent to $1,230.42. All three metals were headed for weekly losses.