(Reuters) - Gold rose more than 1% on Thursday, recouping losses from the previous session, as a drop in oil prices following a U.S.-Iran interim agreement dampened inflation expectations and supported bullion.
Spot gold was up 1.4% at $4,316.42 per ounce, as of 0242 GMT, after declining 1.7% on Wednesday. U.S. gold futures for August delivery fell 1% to $4,336.70.
"It's a bit of short position unwinding (in gold) given yesterday's steep fall and the reason for the short unwinding is also due to the positive news coming out from the Middle East, which has caused oil prices to fall," said Kelvin Wong, a senior market analyst at OANDA.
The United States and Iran released the text of their interim agreement on Wednesday, with U.S. President Donald Trump threatening to resume attacks and kill Iranian officials if they failed to honour their commitments.
The 14-point agreement extends the ceasefire announced in April by another 60 days to allow the two sides to negotiate a final truce.
Oil prices fell, reversing gains made on Wednesday after Trump said he could resume his bombing campaign if Iran's leaders "don't behave".
Elevated oil prices stoke inflation concerns and raise expectations of higher interest rates. Gold tends to lose appeal when rates are high, as it does not yield interest.
"I expect gold prices to remain muted on the upside, given the fact that market participants now have repriced a higher possibility of the Federal Reserve to kind of kickstart an interest rate-hike cycle," Wong said.
Nine of the U.S. central bank's 19 policymakers now believe they will need to raise the policy rate this year, according to projections published on Wednesday after the Fed announced its decision to leave the policy rate in its current 3.50%-3.75% range.
Spot silver rose 1.8% to $69.18 per ounce, platinum gained 1.2% to $1,757.53, and palladium was up 1.3% at $1,329.99.