Gold steady as markets assess Middle East escalation, Fed hike bets

"In the longer term, I'm more cautious on gold and looking at the key $3,886 level, which, if taken out on the downside, could potentially unleash further weakness towards $3,500," said Kelvin Wong, a senior market analyst at OANDA.

Elsewhere, spot silver XAG= gained 1.8% to $56.91 per ounce, platinum XPT= was up 0.8% at $1,603.99, and palladium XPD= rose 1.2% to $1,263.14.

Oil prices jumped more than 3% after U.S. forces struck Iran for a ninth consecutive day on Monday as the number of confirmed American military deaths in the renewed fighting rose to three and concerns grew over shipping through the Strait of Hormuz.

"The war is still ongoing, with a focus on rising oil prices that could lead to higher inflation, which is keeping gold pressured," said GoldSilver Central Managing Director Brian Lan.

However, "$4,000 has been an important level, and shows that there is support for the metal when it falls below that mark."

Elevated oil prices stoke inflation fears and bets of higher-for-longer interest rates. While gold is typically seen as an inflation hedge, high interest rates increase the opportunity cost of holding the non-yielding asset.

Cleveland Fed President Beth Hammack added her voice to a growing chorus of policymakers arguing interest rates may need to rise to beat back persistent inflation, setting up a charged debate at the Fed's next meeting on July 29.

Traders are now pricing an 82% chance of a December interest-rate hike, versus 73% last week, according to the CME FedWatch tool.

July 20 (Reuters) - Gold prices were little changed on Monday as investors assessed an escalation in the Middle East war that pushed oil prices higher, while another U.S. Federal Reserve policymaker signalled that interest rate hikes may be needed to curb inflation.