Gold is moving back towards $4,200 an ounce after one of its sharpest stretches of selling this year, as a softer dollar and easing Treasury yields give investors room to rebuild positions.
Spot gold rose about 1% to around $4,177 on Friday, while US futures traded above $4,200.
The move follows Wednesday’s slide to roughly $4,067, its lowest level since early August. Bullion still remains well below its January record above $5,300.
Falling yields give gold some breathing room
The immediate trigger is a reversal in two forces behind the latest sell-off: the dollar and US bond yields.
The 10-year Treasury yield climbed above 5.3% earlier this week, reaching levels not seen since 2002, while the dollar pushed close to an 18-month high.
Both moves raised the opportunity cost of holding non-yielding gold and made bullion more expensive for buyers using other currencies.
Those pressures eased on Friday after solid Treasury auctions steadied the bond market and the dollar rally paused.
The World Gold Council said gold fell 8.5% in September as the 10-year yield rose 53 basis points and the dollar index gained 2%, showing how closely the correction has tracked rates.
ING analysts said high Treasury yields and dollar strength could still cap gold’s upside even as immediate Fed tightening expectations fade.
Fed risk has shifted from October to December
Gold is also benefiting from a change in the timing of Federal Reserve expectations.
Markets now assign only about a 17% chance of another rate increase at the Fed’s October meeting, while a December hike remains heavily priced.
That has removed some of the immediate pressure that followed the Fed’s 25-basis-point increase in September.
The policy backdrop is hardly dovish. St Louis Fed President Alberto Musalem said at a Bloomberg event on Thursday that inflation remains elevated and policy must bring it back towards the 2% target.
That leaves gold in an awkward position: lower near-term hike risk supports the rebound, but persistent inflation and the prospect of tighter policy later this year limit the case for a clean breakout.
Central-bank buying is rebuilding a floor
The strongest argument against another deep leg lower is that underlying demand has not disappeared.
Global central banks bought a net 39 tonnes of gold in August, according to the World Gold Council, with China, Uzbekistan and Poland among the leading buyers.
The council also found that 89% of surveyed reserve managers expect global central-bank gold holdings to increase over the next year.
Phillip Nova analyst Priyanka Sachdeva told Barron’s this week that gold’s structural drivers remain intact despite the correction, with the $4,000 area likely to attract incremental buying if the long-term case holds.
Oil eased on Friday after Donald Trump said the US would not attack Iran before the November midterm elections, but Middle East supply risks continue to feed inflation concerns.
That makes $4,200 the immediate test. A sustained move above it would suggest the selling pressure is easing.
Failure there would leave the rebound looking more like a pause in a correction that is not yet finished.
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