Gold bars Photographer: Milan Jaros/Bloomberg Photo by Milan Jaros /Bloomberg

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(Bloomberg) — Gold held a modest gain after President Donald Trump said the US and Iran were in talks to end the war that’s stoked inflationary concerns and raised the likelihood of higher interest rates.

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Bullion was near $4,065 an ounce, after advancing 0.6% in the previous session. Trump said there’s “a good chance that something could happen” regarding a deal, comments that appeared to reduce the immediate prospect of military escalation in the Middle East. The US leader added, however, that a return to fighting is likely if negotiations don’t yield a deal.

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Oil extended a drop on Tuesday after Washington held off attacking Iran for a third straight day. Tehran, in turn, has paused strikes on countries around the Persian Gulf. Meanwhile, negotiators from Iran and Oman are trying to reach a deal to restart shipping through the Strait of Hormuz, which carried a fifth of daily oil flows in peacetime.

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Gold has hovered near $4,000 an ounce since late June, with a wave of dip-buying keeping the metal largely above the psychological threshold in recent weeks. Reinforcing that support, bullion-backed exchange-traded funds added holdings for five straight days — the longest streak of gains since May.

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Bullion is nevertheless down by more than a fifth since the war began five months ago. Looking forward, traders are now positioning themselves for a potentially contentious rate decision by the Federal Reserve later this week, with policymakers torn between June’s tamer-than-expected reading on US consumer prices and the more recent rise in energy costs that accompanied renewed fighting in the Middle East.

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Interest-rate swaps imply about a 40% chance of a quarter-point increase on Wednesday, an unusually high degree of uncertainty so close to a Fed decision by the standards of recent years. Citadel Securities said it expects a hike this week, a move it argues would strengthen Chairman Kevin Warsh’s credibility in the battle with inflation.

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Spot gold slipped 0.3% to $4,065.32 an ounce at 8:15 a.m. in Singapore. Silver edged down 0.3% to $58.19 an ounce. Platinum and palladium also traded lower. The Bloomberg Dollar Spot Index, a gauge of the US currency, rose 0.1%.

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