Gold rises 0.7% to $4,169 as ETF demand offsets high yields

Spot gold climbed 0.7% to $4,168.89, while December U.S. gold futures advanced 1% to $4,196.90, reflecting ongoing investor demand despite long-term borrowing costs near multi-decade highs. This gain comes after a challenging September, when gold prices dropped 6.6% in the face of significant exchange-traded fund (ETF) inflows.

Fed rate outlook shifts after jobs data

Recent employment data indicated a weaker-than-expected September for the U.S. labor market, along with downward revisions to previous months’ payroll figures. As a result, the likelihood of another Federal Reserve rate hike this month has fallen sharply, with market estimates dropping to about 21%, compared to nearly 70% before the latest jobs report.

The correlation between gold and interest rates is essential, as gold does not generate yield. Elevated rates generally heighten the opportunity cost of holding bullion, making it less attractive when Treasury yields are above 5% and supporting a stronger dollar. In this environment, gold’s ability to rise underscores shifting market expectations for the U.S. central bank.

Demand from ETFs and central banks supports gold

Despite persistent pressure from strong yields and the dollar, global physically backed gold ETFs recently achieved a record holding of 4,189 tonnes. August saw $18 billion in ETF inflows. Simultaneously, China’s central bank continued its bullion accumulation, adding 20.2 tonnes in August and marking 22 consecutive months of purchases.

This collective demand from both investors and central banks has offset the drag of high interest rates, providing support to gold’s price even as macro pressures linger.

Mini dictionary: ETF (Exchange-Traded Fund), a type of investment fund traded on stock exchanges, holding assets such as stocks, commodities, or bonds and generally designed to track a specific index.

The World Gold Council, a leading industry body, tracks investment flows into these funds as a key measure of investor sentiment toward bullion.

Structural shift in global reserves

A growing trend among central banks is shaping a new dynamic for the gold market. Gold now accounts for approximately 27% of global official reserves, surpassing U.S. Treasuries, as these institutions diversify away from dollar-denominated holdings. This strategic move has reduced gold’s traditional inverse relationship with bond yields, making prices less sensitive to rising rates.

Morgan Stanley, a major American investment bank, has highlighted $4,000 as a critical support level for gold, referencing solid physical buying, the prospect of falling bond yields, and a possible decline in energy prices. The bank’s analysts signaled that a price dip toward this level could attract significant renewed interest from buyers.

Markets now see only a 21% chance of a Fed rate increase this month, down from about 70% before the weaker jobs data, sharply altering the interest rate outlook.

While the outlook for gold remains shaped by inflation risks and shifts in monetary policy, robust demand from both ETFs and central banks continues to provide crucial support in the current high-yield environment.