Gold's biggest enemy could become its biggest supporter: The unusual US bond market paradox

Gold prices have come under pressure from rising US Treasury yields, a stronger dollar and expectations of further interest rate hikes. However, the very forces currently weighing on bullion could eventually trigger its next rally if prolonged monetary tightening begins to hurt economic growth, according to Motilal Oswal Financial Services.

In its November 4 commodities report, titled Gold's Rally: Deferred Not Derailed, Motilal Oswal highlighted an unusual paradox in the gold market: rising bond yields initially discourage investment in the non-yielding metal, but sustained financial stress could eventually revive demand for gold as a safe-haven asset.

Why rising US bond yields hurt gold

Gold does not generate interest or dividends. When US Treasury yields rise, investors can earn higher returns from government bonds, increasing the opportunity cost of holding bullion.

A stronger US dollar adds further pressure by making dollar-denominated gold more expensive for investors holding other currencies.

According to Motilal Oswal, the US Federal Reserve raised interest rates by 25 basis points in September to 3.75–4%, reversing the monetary easing narrative that supported precious metals earlier.

Persistent inflation has complicated the outlook. US consumer inflation accelerated to 3.7% year-on-year in September, while producer prices increased 6.3% annually, keeping expectations of additional monetary tightening alive.

When higher yields could start supporting gold

The brokerage believes the relationship between gold and bond yields could change if monetary tightening begins damaging economic activity.

Higher borrowing costs can weaken corporate investment, slow consumption and increase pressure on heavily indebted governments and businesses.

If these conditions trigger concerns about financial instability or recession, investors may return to gold despite elevated nominal bond yields.

Motilal Oswal argues that the crucial turning point may arrive not when nominal Treasury yields peak, but when inflation-adjusted, or real, yields stop rising.

Fiscal uncertainty, government debt concerns and geopolitical tensions could further strengthen safe-haven demand.

Axis Direct also sees recovery potential

Axis Direct has highlighted similar near-term pressures from elevated interest rates, inflation concerns and dollar strength.

Deveya Gaglani, Senior Research Analyst – Commodities, Axis Direct, expects international gold prices to potentially test support levels of $3,700 and $3,600.

However, the brokerage maintains a bullish longer-term outlook, projecting domestic gold prices of ₹1.65–1.80 lakh per 10 grams by next Dhanteras.

Axis Direct recommends staggered accumulation rather than investing a lump sum.

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What should gold investors watch?

Motilal Oswal maintains a buy-on-dips stance, identifying $3,800–3,900 per ounce as an accumulation zone. It projects $4,200 in the short term and $4,500–4,700 over the medium term.

Structural demand remains supportive. Global gold ETF holdings reached a record 4,256 tonnes after increasing approximately 187 tonnes during August–September.

For investors, the key indicators are US real yields, inflation expectations, Federal Reserve policy and the dollar's direction.

The central paradox remains: bond-market stress that initially pushes gold lower could eventually become the catalyst for its recovery. However, the timing remains uncertain, and the brokerages' price targets are projections rather than guaranteed returns.