Gold’s appeal is fading as U.S. Treasury yields surge and markets increasingly bet that the U.S. Federal Reserve (Fed) will continue raising interest rates.

In the coming days, gold prices may continue to face downward pressure. Rising U.S. Treasury yields, coupled with expectations of further monetary policy tightening by the Fed, are weighing on demand for the non-yielding asset.

Market Context: Higher Interest Rates Weigh on Gold Prices

Spot gold recently fell sharply by as much as 4%, dropping to $4,111 per ounce — its lowest level since August 5. The selling pressure was driven by several key macroeconomic factors:

• Treasury yields hit multi-year highs: The yield on 10-year U.S. Treasury bonds reached its highest level since June 2007. The 2-year Treasury yield, which is particularly sensitive to interest-rate expectations, also rose sharply this month.

• Expectations of another Fed rate hike: Markets are currently pricing in roughly a 70% probability that the Fed will raise interest rates for a second consecutive time in October.

• Rising oil prices: Higher oil prices, amid stalled U.S.-Iran negotiations, have also contributed to pressure across financial markets.

The research director at BullionVault commented: “The highest U.S. borrowing costs in decades have finally forced gold prices to retreat.”

When interest rates rise, investors tend to favor yield-generating assets such as bonds over gold. At the same time, higher financing costs for speculative positions increase the opportunity cost of holding the precious metal.

Investors Begin Pulling Capital from Gold

Market data points to growing caution among investors:

• According to the U.S. Commodity Futures Trading Commission (CFTC), as of the week ending September 22, net long gold positions held by money managers fell to their lowest level since late July, when gold was trading around $4,000 per ounce.

• According to the World Gold Council, gold ETFs recorded modest outflows of around 1.6 tonnes last week, although total holdings remained substantial at 4,249 tonnes.

Asian Consumer Demand Lacks Momentum

Adding to the subdued outlook, demand from some of the world’s largest gold-consuming markets is also showing signs of slowing:

• China: Consumer demand weakened ahead of the National Day holiday, which runs from October 1 to October 7. The premium for domestic gold prices over global benchmark prices fell to zero by the end of last week.

• India: According to Rhona O’Connell, an analyst at StoneX, the market could receive support from continued central-bank purchases, as well as stronger demand in India ahead of the Diwali festival and the wedding season. However, she noted that historically high gold prices are likely to weigh on jewelry demand among price-sensitive consumers, particularly farmers, especially as the monsoon season has been relatively weak.

In summary: With higher opportunity costs amid elevated interest rates and signs of slowing physical demand, gold may continue to face challenges in regaining upward momentum in the short term.

Source: Reuters