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Gold prices fell 3% on Monday after U.S. President Donald Trump said he was reinstating a naval blockade on Iran, boosting oil markets, reigniting inflation concerns and raising prospects of higher-for-longer U.S. interest rates.

Spot gold fell for the second straight session, down 3% at $3,996.76 per ounce by 1:40 p.m. EDT (1740 GMT), after hitting its lowest level since July 1.

U.S. gold futures settled 2.6% lower at $4,005.7.

"Oil prices are rallying because of the Middle East conflict, and there is potential for policy tightening from the Federal Reserve. This is bad news for zero-yielding assets like gold," said Fawad Razaqzada, market analyst at Forex.com.

"If oil prices continue to push higher, gold prices could break down and potentially head towards the $3,800 level initially and possibly to $3,500 over time if the selling pressure accelerates," he added.

RATES OUTLOOK

Trump said on Monday the U.S. was reinstating a naval blockade on Iran, and would be reimbursed 20% on all cargo shipped through the Strait of Hormuz after Tehran claimed it had closed the strait. Oil futures jumped 5% on the news. [O/R]

Higher oil prices can fuel inflation by raising energy and transportation costs across the economy, potentially prompting central banks to keep interest rates higher for longer or even raise them further to curb price pressures.

According to the CME Group's FedWatch Tool, traders currently see a 75% chance that the U.S. central bank will raise interest rates in September.

On Tuesday, Fed Chair Kevin Warsh is expected to deliver his first monetary policy testimony before Congress. Market participants will scan his remarks for clues on the outlook for rates.

The U.S. government is due to release key data this week, including the Consumer Price Index, Producer Price Index, and retail sales reports for June and weekly jobless claims.

Among other metals, spot silver slipped 3.8% to $57.55 per ounce, platinum dipped 1.7% to $1,599.47, and palladium was down 2.1% to $1,249.70.