Gold Faces Central Bank Demand Amid Rising Real-Yield Pressure: Kotak Sec

Gold’s Tug-of-War: Central Bank Demand vs. Rising Real Yields

As gold prices face downward pressure from rising real yields, central bank demand continues to provide a structural support.

Understanding the Current Market Dynamics

Gold’s recent price movements can be dissected into two distinct phases, each influenced by different market forces. The first phase saw gold prices drop from approximately $4,700 in late August to below $4,250 by mid-September, a nearly 10% decline in just a few weeks. This initial drop was largely driven by heightened expectations of a Federal Reserve rate hike, spurred by stronger-than-expected inflation data. During this period, 10-year Treasury Inflation-Protected Securities (TIPS) yields remained relatively stable, indicating that the price drop was more about market sentiment regarding future Fed actions than a fundamental shift in real yields.

The second phase of the correction, however, has been markedly different. As real yields surged from 2.46% to around 2.95% in early October, the market has faced a dual challenge: rising yields and a stronger dollar. This divergence, where real yields rise even as the likelihood of near-term rate hikes diminishes, has created a unique headwind for gold. The dollar index recently surpassed 102, its highest level since April 2025, further complicating the outlook for gold as it makes the metal more expensive for foreign buyers.

Central Bank Demand: A Silver Lining?

Despite the macroeconomic pressures, the structural demand for gold remains robust. The People’s Bank of China has extended its gold-buying streak to 23 consecutive months, increasing its holdings to 77.47 million fine troy ounces. Central bank purchases globally reached 595 tonnes in the first eight months of the year, although net buying has slowed as some larger holders liquidate portions of their reserves. This trend of gross versus net buying is crucial for investors to monitor, as it may indicate shifting sentiments among sovereign holders.

Moreover, gold-backed ETFs added over 70 tonnes in September, marking a fifth consecutive month of inflows despite a 7% decline in gold prices. This trend suggests that the investment rationale for gold is not merely momentum-driven but reflects a deeper conviction among investors about gold’s long-term value as a hedge against economic uncertainty.

Looking Ahead: Key Catalysts and Technical Levels

The upcoming Federal Open Market Committee (FOMC) minutes are expected to provide further insights into policymakers’ views on the economy and interest rates, especially following the disappointing jobs report. Gold has struggled to maintain gains above the $4,200 mark, indicating that the market remains cautious about pricing in a recovery based solely on softer economic data.

Technically, MCX Gold futures for December are likely to remain sideways to mildly bearish in the near term. Prices have slipped below the rising trendline, trading under the critical level of 150,987. A sustained trade below this level could lead to further declines towards 146,815, with potential support at 145,630–144,800. Conversely, a decisive move above 151,970 would improve the technical outlook, opening the door to higher levels.

Key Highlights

• Gold is currently trading around $4,130, influenced by central bank demand and rising real yields.
• Real yields have reached their highest levels since 2008, creating headwinds for gold.
• Central banks, particularly the People’s Bank of China, continue to accumulate gold, providing structural support.
• Gold-backed ETFs have seen significant inflows despite recent price declines.
• Technical indicators suggest a cautious outlook, with key resistance at 151,970 and support levels below 150,987.

Investor Note: The interplay between rising real yields and central bank demand will be crucial for gold’s performance in the coming weeks. Investors should monitor macroeconomic indicators and technical levels closely to navigate this complex landscape.