Gold prices rose more than 1% on Tuesday as investors weighed diplomatic efforts to ease the U.S.-Iran conflict, which could temper oil-driven inflation risks and influence the U.S. Federal Reserve's interest rate path.
Spot gold rose 1.6% to $4,071.59 per ounce by 0750 GMT. U.S. gold futures for August delivery were up 1.5% at $4,076.00.
"It looks like gold is trying to find a base somewhere around this ($4,000) level and is going to try to re-engage the upside from there," said Ilya Spivak, head of global macro at Tastylive.
"These headlines from the Middle East seem to have some degree of knock-on, though it is increasingly only being paid attention to in a passing kind of way."
Oil prices softened on Tuesday, with markets weighing reports of mediation efforts between the U.S. and Iran against an exchange of fresh attacks between the two and threats of a naval blockade of Saudi Arabia by Yemen's Houthis.
A senior Iranian official told Reuters on Monday that Tehran had received a proposal from mediators for a 10-day ceasefire in efforts to salvage the interim deal, intended to pave the way to a lasting agreement to end the war.
The recent escalation in the conflict drove oil prices to a more than one-month high on Monday, with a growing chorus of U.S. policymakers arguing interest rates may need to rise to counter persistent inflation.
High interest rates increase the opportunity cost of holding non-yielding bullion.
While the Federal Reserve is widely expected to keep interest rates unchanged next week, traders are pricing in a 64% chance of a hike in September, according to the CME FedWatch Tool.
Spot silver gained 4.5% to $58.96 per ounce, platinum was up 2.3% at $1,630.21 and palladium rose 2.8% to $1,288.02.
