Gold Slides Over 2% as Middle East Tensions Stoke Inflation Fears

• Iran vows to hit Gulf infrastructure if US strikes power grid
• Market bets on Fed rate hike this year surge
• Oil prices remain above $110 per barrel

By Noel John

March 23 (Reuters) - Gold prices slipped more than 2% on Monday, extending their drop to a roughly four-month low, as an escalating Middle East conflict stoked inflation concerns and expectations of higher global interest rates.

Spot gold XAU= was down 2.5% at $4,372.86 per ounce, as of 0238 GMT, extending losses for a ninth consecutive session. The metal, which fell on Monday to its lowest level since January 2, lost more than 10% last week.

U.S. gold futures for April delivery fell 4.4% to $4,375.60.

"With the Iranian conflict into its fourth week, and oil prices hanging around the $100 level, expectations have pivoted from rate cuts to potential rate hikes which has tarnished gold's appeal from a yield point of view," said Tim Waterer, chief market analyst, KCM Trade.

Escalating the three-week-old war, Iran said on Sunday it would strike the energy and water systems of its Gulf neighbours in retaliation if U.S. President Donald Trump follows through with a threat delivered a day earlier to hit Iran's electricity grid in 48 hours.

"Gold's high liquidity appears to be hurting it during this risk-off period. Steep selloffs on stock markets in Asia today are leading to a further unwinding in long gold positions," Waterer said.

Asian shares fell and oil prices stayed above $110 a barrel, as investors weighed U.S. and Iranian threats to target energy facilities.

The closure of the Strait of Hormuz kept crude elevated, stoking inflation through higher transport and manufacturing costs. While rising inflation typically boosts gold's appeal as a hedge, high interest rates curb demand for the non-yielding asset.

Meanwhile, market pricing for a U.S. Federal Reserve interest rate hike this year has shot up, and is now seen as far more likely than a rate cut, as interest rate futures were pricing around a 27% chance of a rate hike by December, as per the CME FedWatch tool.

Spot silver XAG= lost 3.2% to $65.61 per ounce. Spot platinum XPT= fell 2.9% to $1,866.65 and palladium XPD= was down 0.5% at $1,397.25.