Gold's slide tracks a familiar playbook traders keep reaching for: rising oil prices lifting inflation expectations, which in turn firms up bets on higher US rates and weighs on non-yielding bullion. Whether that chain of reasoning fully holds this time is worth questioning, given this week's US inflation data actually came in soft, with consumer prices slowing and producer prices declining. Yet the dollar and Treasury yields both moved higher regardless, suggesting energy-driven inflation fears are currently outweighing the disinflationary signal from the official data. Traders are now pricing in roughly a coin-flip chance of a September hike, per the CME FedWatch Tool, and that repricing is doing more to pressure gold than actual inflation prints.---Gold sinks on a rate-hike narrative that this week's actual inflation data doesn't fully support.Summary:Spot gold fell about 1.9%, to roughly $3,985 an ounce, after dropping as much as circa 2% and touching its lowest level since July 1, according to Reuters.US gold futures settled down about 1.5%, to around $3,992, per Reuters.Oil held near a one-month high after Iran asked the Houthis to be ready to close the Red Sea route if the US strikes Iranian power infrastructure, according to Reuters.Traders are pricing in roughly a 53% chance of a Federal Reserve rate hike in September, according to the CME FedWatch Tool.The 10-year US Treasury yield drifted higher and the dollar gained about 0.2%, making gold more expensive for overseas buyers, per Reuters.Fed Chair Kevin Warsh said this week he is determined to bring inflation down, without detailing how, according to Reuters.US consumer inflation slowed in June while producer prices declined in data released this week, according to Reuters.Gold fell by roughly 2% on Thursday to its lowest level in more than two weeks, as escalating tensions in the Middle East pushed oil prices and US Treasury yields higher, reinforcing market expectations that the Federal Reserve will need to keep interest rates elevated for longer.Spot gold dropped about 1.9% to trade near $3,985 an ounce, after falling as much as circa 2% intraday and touching its weakest level since July 1. US gold futures settled down around 1.5%, at approximately $3,992.The move lower in bullion came as oil held close to a one-month high, with concerns over Middle East supply intensifying after Iran reportedly asked Yemen's Houthi movement to stand ready to close the Red Sea export route should the US strike Iranian power infrastructure. The logic doing the rounds among gold traders, and one that appears to be getting recycled rather than freshly tested, is that higher oil prices stoke inflation fears, which lift expectations for US rates and reduce the appeal of a non-yielding asset like gold. One analyst noted that renewed strength in Brent is reinforcing expectations that US yields, and potentially rates, could move higher as soon as September, adding pressure to bullion.That narrative is worth treating with some caution, however. Traders are currently pricing in only about a coin-flip chance, roughly 53%, of a September rate hike, according to the CME FedWatch Tool, hardly a settled outcome. And the inflation backdrop is more mixed than the oil-driven story suggests: data released this week showed US consumer price growth actually slowing in June, while producer prices declined the following day, both of which would typically argue for a more dovish Fed stance rather than a more hawkish one.Still, the market reaction suggests energy-driven inflation risk is winning out over the softer official data for now. The 10-year Treasury yield drifted higher, and the dollar firmed about 0.2%, making gold costlier for holders of other currencies. New Fed Chair Kevin Warsh added to the cautious tone this week, declaring his determination to bring inflation back down, though he stopped short of signalling how or when.One analyst summed up the tension facing the Fed: even if near-term economic data continues to soften, persistently elevated energy prices could make it difficult for policymakers to pivot toward a more dovish stance, a dynamic that for now is keeping investors leaning toward the dollar over zero-yielding gold. This article was written by Eamonn Sheridan at investinglive.com.