Gold’s next leg higher faces hurdle as yields rise, Fed rate-hike bets return

New business data points to the fact that Gold's surge is losing momentum as rising US Treasury yields and renewed expectations of The US central bank rate hikes weigh on the non-yielding asset. After gaining 11 percent over July and August, gold has declined 6 percent so far this month and is at present hovering around $4,300 an ounce.

The pressure has intensified as markets have increased bets of another interest-rate gain by the Fed. The CME FedWatch tool now reveals a 68 percent probability of a 25-basis-point hike in October, up from 57 percent a week ago. Elevated interest rates and bond yields typically reduce the appeal of gold, as the metal does not offer an income.

Rising yields cap gold’s near-term upside

The biggest immediate hurdle for gold is the sharp climb in US bond yields. The 30-year Treasury yield has approached 5.5 percent, its highest level in more than two decades.

“Elevated yields gain the opportunity cost of holding non-yielding bullion,” commodity market watchers at Kotak Securities stated, adding that US fiscal concerns are additionally keeping gold below its recent highs.

Market watchers expect gold’s medium-term fundamentals to stay cautiously positive, but see pressure in the near term. A sustained slide in crude prices, easing yields or a fresh wave of geopolitical and fiscal risk could revive investment demand and backing gold.

For now, that stated, elevated energy inflation and expectations of rates staying elevated for longer stay key headwinds. Kotak stated gold, consolidating around $4,300, needs a fresh catalyst for the next move.

Fed, oil and AI boom create a tug of war

Peter McGuire, CEO of Trading.com, sees gold caught between two competing forces. On one side are inflation risks and geopolitical tensions, which could gain demand for safe-haven assets. On the other are rising yields and firm risk appetite, which could keep market participants in equities and other elevated-returning assets.

McGuire pointed out that Wall Street’s record-breaking surge, fuelled by AI and heavy technology capex as evidence that market participants are not yet positioning for a sharp economic downturn.

This creates a key question for gold: whether market participants will move back into safe-haven assets to protect against inflation, or continue chasing risk assets if the AI-led expansion optimism stays intact.

The oil market could be particularly important too. McGuire stated renewed supply disruptions around the Strait of Hormuz could propel energy prices elevated, revive inflationary pressures and strengthen expectations of further Fed rate hikes: a combination that could weigh heavily on gold.

“Gold could face a harsh winter ahead” if those inflationary pressures translate into elevated yields and stronger rate-hike expectations, he stated. Central banks provide a floor

Still, market watchers see structural backing for gold from continued central bank buying. McGuire noted that central banks continued accumulating gold through the summer despite elevated prices and tighter monetary policy.

The People's Bank of China bought 20.2 tonnes of gold in August, its largest monthly purchase since late 2023, while Poland remained among the biggest buyers this year. European funds additionally recorded positive net gold ETF inflows in August. This buying could limit the extent of any correction, as central banks may use periods of softness to add to their reserves. Gold needs a fresh catalyst

N S Ramaswamy, Head of Commodity & CRM at Ventura, anticipates gold to stay range-bound to mildly bearish in the near term if the dollar and bond yields stay firm.

On COMEX, he sees backing at $4,200-$4,250 and resistance at $4,360-$4,450. On the MCX, backing is placed at Rs 1,49,000-Rs 1,50,000, while resistance is noted at Rs 1,53,000-Rs 1,54,000.

The broader picture, as a result, stays mixed. Gold retains backing from central-bank demand and its safe-haven role, but the next leg elevated may have to wait for yields to ease, the dollar to weaken or geopolitical risks to intensify.