Gold holds firm as rate hike risks fade despite elevated bond yields

Key Points:

• Fed hike concerns are easing: Softer inflation, employment and consumer data are reducing the risk of another rate hike, strengthening the case that the Fed’s next meaningful move may ultimately be a cut.
• Dollar weakness adds support: The dollar is showing signs of rolling over after its recent strength, removing another important headwind for bullion.
• Investment demand is returning: ETF inflows are picking up alongside continued central-bank demand, broadening the investor base after Western participation had previously been subdued.
• High bond yields remain the key risk: Long-end Treasury yields remain near multi-year highs amid fiscal and debt concerns, compounded by growing competition for capital from hyperscalers funding the AI infrastructure buildout.

Gold is holding near USD 4,400 after recently breaking higher from a week-long consolidation phase, during which support was found and eventually established just below USD 4,000. The rebound has been supported by a combination of fading Federal Reserve rate-hike expectations, a softer dollar and renewed investment demand, while elevated long-end bond yields remain the main headwind.

Easing rate expectations and softer dollar support the gold rebound

The interest-rate backdrop has shifted noticeably in gold's favour. Recent softer US employment, inflation and consumer data have reduced the urgency for further monetary tightening. July retail sales fell 0.6%, the first decline in nine months, while consumer sentiment also weakened, prompting markets to reduce the probability of a September rate hike.

Goldman Sachs is the latest bank to join our long-held view that the FOMC may struggle to raise rates further. Its chief economist Jan Hatzius described a September increase as "very unlikely" and argued that markets continue to price an excessively hawkish Fed path given the recent moderation in inflation, employment and consumer spending.

The dollar is providing another tailwind. After strengthening sharply earlier in the year, the Bloomberg Dollar Index has begun to roll over, reinforcing the traditional relationship between a weaker dollar and higher gold prices. Importantly, this is occurring while expectations for further Fed tightening are being reduced, potentially removing two of the headwinds that contributed to gold's earlier correction.

Bond yields remain the key outlier: focus on fiscal debt and AI-driven issuance

The odd one out remains the bond market. Long-dated US Treasury yields remain close to multi-year highs despite softer economic data and declining expectations for Fed tightening. This increasingly suggests that part of the rise in yields reflects a higher term and fiscal risk premium rather than simply expectations for stronger growth or tighter monetary policy. The US government's growing debt burden is becoming increasingly difficult to ignore, with the Congressional Budget Office projecting net federal interest costs now exceeding USD 1 trillion in 2026, rising further over the coming decade.

This creates an unusual but potentially supportive environment for gold. If high long-end yields increasingly reflect concerns about fiscal sustainability rather than economic strength, the historically negative relationship between gold and Treasury yields may continue to weaken. In that scenario, rising yields can themselves become part of the argument for holding gold as a diversification and fiscal-risk hedge.

In addition, the rapid expansion of debt issuance by AI hyperscalers is exerting additional upward pressure on US government bond yields. By flooding fixed-income markets with large volumes of high-quality, long-duration corporate paper, AI-related borrowing is competing directly with Treasuries for institutional capital and lifting the overall term premium.

Investment demand is recovering

Investment demand is also showing signs of returning. Global gold-backed ETFs attracted around USD 3 billion in July, adding 23 tonnes after two consecutive months of outflows, while early-August flows have remained supportive. Speculators in the COMEX futures market have meanwhile increased their net long to a January high, and an 11-month high if focusing only on hedge funds.

Some of the recent demand undoubtedly reflects momentum buying from short-term focused traders following the technical breakout above USD 4,200, but the return of ETF investors is nevertheless important. It broadens a demand base that in recent years has relied heavily on central banks and Asian physical buyers. Central-bank demand remains particularly strong, with second-quarter purchases estimated at 289 tonnes, helping underpin gold even during periods when Western investors have been reluctant buyers.

The dynamic is reminiscent of 2022–23, when aggressive rate hikes and rising bond yields failed to trigger the deep and prolonged correction many investors expected. Strong central-bank buying effectively created an additional source of demand that was less sensitive to real yields and the opportunity cost of holding a non-interest-bearing asset.

Key risks to the outlook

What could go wrong? The most obvious risk is another reversal in US monetary-policy expectations. A renewed acceleration in inflation, stronger employment data or a rebound in consumer activity could revive rate-hike expectations, lifting both real yields and the dollar. The combination of higher real yields and a stronger dollar remains arguably the most challenging macro backdrop for gold.

Persistently elevated long-end yields are another concern, a development potentially made worse by the increased competition for funding from AI hyperscalers. While fiscal-risk-driven yields can support gold's diversification appeal, there is a limit: a renewed surge in real yields could eventually raise the opportunity cost of holding bullion sufficiently to trigger profit taking. In addition, part of the latest rally has been momentum-driven, leaving the market vulnerable to a correction if the technical breakout fails.

Technical picture and conclusion

For now, however, the balance of drivers has improved. Gold has re-established support above USD 4,200 and is trading near USD 4,400, with the USD 4,500 area where the 200-day moving average represents the next major technical hurdle. A sustained break above this zone may in our opinion strengthen the recovery signal encouraging further ETF and momentum demand. Conversely, a failure followed by a move back below USD 4,200 would suggest that the market remains trapped in a broad consolidation rather than having embarked on a renewed bull-market leg.

Overall, gold is increasingly finding support from a combination of fading rate-hike expectations, a softer dollar, persistent central-bank demand, returning ETF flows and growing concerns about US fiscal sustainability. The main question is whether these forces can continue to outweigh unusually elevated long-term bond yields. So far, the answer appears to be yes.