Will Gold Test $4,100 as the Dollar Strengthens and Yields Climb?

Pressure on spot gold left prices marginally lower on Monday, as the dollar strengthened and US Treasury yields recovered. Beneath those immediate drivers, tensions in the Middle East and Eastern Europe are lifting oil prices and fuelling expectations that inflation will remain persistent. In turn, this bolsters expectations of further Federal Reserve rate hikes and enhances the dollar’s appeal as a safe haven, leaving non-interest-bearing gold facing pressure from several directions.

Monday’s recovery took the US 10-year Treasury yield to around 5.14% and the 30-year yield to roughly 5.477%, alongside an approximately 0.22% rise in the US Dollar Index. As AI shares recovered on Monday, safe-haven capital began returning to equities from US Treasuries, where it had sought shelter during the sharp sell-off in artificial intelligence stocks. The shift drove a swift rebound in yields after last week’s sizeable declines. For investors holding other currencies, dollar-denominated gold becomes directly more expensive when the dollar strengthens. Higher real yields also diminish the relative attraction of gold, which offers no yield.

Concerns that central banks may need to tighten policy further to curb inflation are lending renewed upward impetus to yields. With yields staying high, investors are reconsidering the relative merits of holding bonds rather than gold, while markets assess the consequences of elevated interest rates and policy uncertainty. Attention is also turning to next week’s Personal Consumption Expenditures (PCE) data. As the Fed’s preferred measure of inflation, the release will directly shape market pricing of a December rate hike.

Energy prices explain why the escalation in the Middle East and Ukraine is indirectly pressuring gold, rather than supporting it as the usual market narrative around geopolitical conflict would suggest. Reports indicate that Iran is intensifying attacks on merchant vessels in the Strait of Hormuz, seeking to raise energy prices before the US midterm elections and, in doing so, put political pressure on the Trump administration. With oil still trading near a five-month high, concerns over persistent global inflation are being directly amplified. Costlier energy makes a rapid shift towards monetary easing more difficult for the Fed, reinforcing expectations of additional policy tightening.

An emerging pattern in market behaviour shows that equity market turbulence can temper expectations of further Fed tightening, even while inflation remains elevated. By contrast, when geopolitical risks lift inflation expectations via energy prices, both safe-haven demand and rate-hike expectations lend support to the dollar. Gold is consequently pulled between its established role as a safe haven and the pressure exerted by interest rates and the dollar. In the short term, those latter forces are more likely to prevail.

Market Insight: What Is Driving Gold’s Pullback?

Gold’s modest retreat cannot be explained by a technical correction alone. Behind it lies the combined impact of geopolitical tensions, transmitted through four channels: oil prices, inflation expectations, the rate-hike path, and demand for the dollar as a safe haven. Close attention should be paid by investors to US Treasury yields, changes in the US Dollar Index, the security of shipping in the Strait of Hormuz, and next week’s PCE data. Taken together, these factors will determine the direction of gold’s next move.