Gold shows remarkable resilience, with central bank gold purchases and ETF demand offsetting the pressure of high real yields, as the gold price holds firmly above $4,000 and targets $5,000 by 2027. An interpretation of the changing relationship between gold and yields and the safe-haven logic amid fiscal concerns.
Author: Jianwei Zhizhu Zatan
Key Points
·Gold is outperforming its macro backdrop: The relationship between gold and real yields from March to July would imply a gold price below $3,000/oz, i.e., about 28% below current levels.
·From here, any retreat in real yields should benefit gold, lowering the cost of holding it and encouraging investment inflows.
·But higher yields do not necessarily mean a lower gold price—if the rise reflects concerns about fiscal sustainability and sovereign risk, it will support gold.
·Falling oil prices should support gold, but if further oil strength triggers growth and stagflation concerns, gold could likewise remain firm.
I. Gold Has Outperformed Its Macro Backdrop
Despite the Fed's recent rate hikes, a stronger dollar, and high global long-term bond yields, gold has only pulled back 10% from its August high and remains above $4,000/oz.
By contrast, if the relationship between gold and real yields from March to July held, the gold price should have already fallen below $3,000/oz, i.e., 28% below current levels.
[Figure 1: Gold increasingly withstands macro headwinds: Strong central bank and ETF demand is helping offset the impact of rising real yields, suggesting gold's relationship with traditional interest rates is changing again]
Lower yields offer the clearest upside path, but higher yields are not necessarily bearish: any weakening in yields would lower gold's holding cost, while our economists also expect the Fed to hike fewer times than the market is pricing.
However, if yields rise further due to fiscal sustainability concerns, investors may increasingly turn to physical assets with no credit risk, which could likewise keep gold firm.
MS Outlook: Gold remains our top commodity pick—we target $5,000/oz by Q2 2027.
Strong physical demand has established support near $4,000/oz, with upside if macro conditions ease or oil prices fall. Fiscal sustainability and/or stagflation concerns provide alternative upside catalysts.
Key risks include further Fed tightening, a stronger dollar, central bank selling, and technical liquidation.
II. Gold's Relationship with Real Yields Is Changing Again
Since 2022, gold's relationship with real yields has been evolving: Chart 2 shows how the relationship has changed since the outbreak of the Russia-Ukraine conflict.
During this period, gold performed far better than expected as central banks doubled annual gold purchases from about 500 tonnes/year to about 1,000 tonnes/year; then in 2025, the price rally accelerated as ETFs added the most gold outside of 2020 and 2008.
However, after the outbreak of the Middle East conflict, gold and yields reverted to a more "normal" relationship—gold fell as rate hike expectations rose, while some central banks sold gold to ease currency pressure.
[Figure 2: Given where real yields are, gold has performed far better than expected]
Gold's macro conditions deteriorated further: In August, macro conditions briefly improved as market rate hike expectations temporarily eased, but entering September, gold's macro conditions deteriorated again.
The Fed hiked rates for the first time since 2023, the dollar strengthened, and the U.S. 10-year Treasury yield rose to its highest level since the early 2000s.
The rise in nominal yields was almost entirely driven by real yields, with the 10-year breakeven inflation rate rising only 4 basis points.
Higher real yields raise the opportunity cost of holding non-yielding gold, while relatively stable inflation expectations limit gold's appeal as an inflation hedge.
Both typically point to significant downside risk for gold.
[Figure 3: U.S. 10-year yields rose to their highest level since 2002 in early October]
But gold's relationship with real yields has evolved again: The gold price did pull back, and is currently 10% below its August high.
However, against this macro backdrop, gold's decline should have been much larger. Extrapolating the relationship between gold and 10-year real yields observed from March to July implies the gold price should now be below $3,000/oz, 28% below current levels.
Instead, the slope of this relationship has flattened, keeping gold firm even with real yields at more than 20-year highs.
We believe this divergence reflects increasingly important structural demand sources, especially central bank buying and ETF inflows, which continued after the September rate hike.
III. Physical Demand Is Reducing Gold's Sensitivity to Macro Factors
Central bank buying momentum continues: After a weak Q1, central banks bought 289 tonnes of gold in 2Q26, an annualized 1,155 tonnes, versus 860 tonnes in FY2025, and our model forecasts 800 tonnes in 2026.
Early signs suggest momentum remained strong in Q3, which could pose upside risk to our 2026 forecast.
For example, China's central bank has bought 103 tonnes year-to-date, the most since 2023, with 60% concentrated in Q3.
[Figure 4: China's central bank has added 103 tonnes of gold year-to-date, the most since 2023]
Poland is still expected to be the largest buyer again in 2026, with its gold reserves rising to 673 tonnes.
That means 123 tonnes bought year-to-date, exceeding the 102 tonnes added in 2025.
September was particularly strong. In addition, the Democratic Republic of the Congo announced plans to raise its gold reserves from 3 tonnes to 5 tonnes by year-end, and Serbia recently added gold as well.
[Figure 5: Poland has added 123 tonnes of gold year-to-date, exceeding its record purchases in 2025]
Broader Chinese demand also looks strong: As of August, China's gold imports reached 1,100 tonnes, an annualized pace that would be the highest since 2017.
This scale is more than 10 times the central bank's increment, indicating that other Chinese demand is also very strong, with weak real estate and equity markets prompting investors to turn to alternative assets such as gold.
ETFs are still adding despite rate hikes: A major driver of gold's strength in 2025 was the 800 tonnes of ETF inflows that poured in when the Fed began cutting rates.
Inflows have been slower this year, at only 250 tonnes, which is reasonable given the more challenging macro backdrop.
However, recent ETF flow data look more encouraging—global gold ETFs recorded their strongest quarterly inflow ever in dollar terms in Q3, at $31 billion, accounting for about 220 tonnes of the 250-tonne increase year-to-date, despite the Fed hiking rates during the period.
In addition, European inflows exceeded U.S. inflows for the first time since 2021, led mainly by the UK.
[Figure 6: Even with the Fed hiking rates, ETFs remain net buyers]
[Figure 7: After tracking closely since mid-2024, ETF holdings have also diverged from the gold price]
Fiscal concerns are changing gold's relationship with yields: Rising bond yields typically weigh on gold, but the reason for the rise in yields matters.
After the September Fed rate hike, yields initially fell, then long-term yields rose again, steepening the U.S. Treasury yield curve.
The U.S. fiscal deficit is approaching $2 trillion, and growing bond issuance as well as competition from long-term AI-related corporate borrowing are adding pressure, potentially reflecting the market demanding higher compensation for duration and fiscal risk.
As the World Gold Council has noted, this may reflect "concerns about inflation uncertainty, fiscal sustainability, and sovereign bond market risk."
Such concerns could encourage diversification into gold—which has no issuer or credit risk—helping explain why ETF demand has remained firm despite rising yields.
IV. Any Retreat in Rate Hike Expectations or Bond Yields Could Bring Upside
Easing rate hike expectations could be a catalyst for gold: Lower rates and/or bond yields would reduce the opportunity cost of holding gold and could encourage new ETF inflows and speculative buying.
Our economists expect the Fed to hike only two more times by end-2027, while the market is pricing about 3.5.
If inflation pressures ease, causing the Fed to hike fewer times than expected, this could ease rate hike expectations and support gold.
The team also expects the U.S. 10-year yield to fall from the current 5.23% to 4.7% by Q3 2027.
Treasury intervention provides another potential catalyst, although further intervention may be unlikely: In August, the Treasury's buybacks of long-term securities coincided with a temporary stabilization in yields and a sharp rebound in gold, with positioning and technical factors amplifying the move.
Further bond purchases or other measures to ease pressure on long-term yields could provide support again, although recent comments by Treasury Secretary Scott Bessent suggest limited willingness for further aggressive intervention.
Therefore, the November 4 refunding announcement will be an important event to watch.
Alternatively, even if long-term yields remain high due to fiscal concerns, a steeper yield curve could reinforce gold's appeal as a substitute for sovereign debt, as long as short-term yields fall on declining rate hike expectations.
V. Further Yield Rises Are Not Necessarily Bearish for Gold[Figure 8: ETF Holdings and Interest Rates]
As noted above, higher bond yields typically weigh on gold by raising the opportunity cost of holding a non-yielding asset.
However, if further increases in long-term yields reflect growing concerns about fiscal sustainability and sovereign debt risk rather than tighter monetary policy, this traditional negative correlation may be weakened.
[Figure 9: Since the outbreak of the Middle East conflict, gold prices have risen by an average of 0.2% on days when oil prices fell and declined by an average of 0.5% on days when oil prices rose]
Gold has no issuer or credit risk, which may encourage diversification away from government bonds, thereby offsetting the headwind from higher real yields.
Historically, during periods of high inflation and fiscal uncertainty (including several periods in the early 1980s), gold has also been able to rise alongside rising bond yields.
This may already be happening, with ETF inflows remaining strong despite rising yields.
The President of the German Bundesbank recently made a similar argument: "The recent rise in global government bond yields has once again increased the relative attractiveness of debt securities.
At the same time, rising debt levels have heightened concerns about the credit risk of these assets.
Moreover, geopolitical risks are likely to continue to influence reserve management decisions. Taken together, the case for further diversification into gold remains strong." Germany holds the world's second-largest gold reserves.
VI. Middle East Conflict: Scenario Analysis for Gold
Gold has not yet played its traditional safe-haven role in this conflict: we examined whether gold still retains its status as a safe-haven asset amid the price decline following the outbreak of the conflict.
The key conclusion is that while gold performs well during demand shocks, it struggles during supply shocks, especially when inflation expectations and bond yields rise as a result.
Best performance on days when oil prices fall: Since the outbreak of the conflict, gold's short-term performance has been closely correlated with oil prices and Treasury yields, with the strongest returns typically occurring on days when oil prices fell.
Lower oil prices ease inflation concerns, reduce expectations for further Fed tightening, and allow yields to fall back, thereby pushing gold prices higher.
If we see a de-escalation in the Middle East that brings oil prices down and alleviates the inflation pressures that had been driving Fed tightening, gold should be supported, especially if Fed rate hike expectations ease and the dollar weakens.
But further strength in oil prices could begin to weigh on growth and raise stagflation concerns: so far, gold has come under pressure when oil prices rise, particularly since late August, as Brent crude rose from $90/barrel to the current $105/barrel, while gold fell from $4,650/oz to $4,160/oz.
In the short term, a spike in oil prices could put further downward pressure on gold prices, especially if gold is used as a source of liquidity.
However, we believe pullbacks should be bought, especially if oil prices remain elevated for an extended period. A sustained period of high oil prices would raise stagflation risks—energy costs feeding into broader inflation while squeezing household incomes, corporate profits, and growth.
As growth weakens, central banks may find it increasingly difficult to justify further tightening, and pausing rate hikes while inflation remains elevated should, all else being equal, support gold.
A stagflationary environment also tends to suppress both stocks and bonds simultaneously, reinforcing gold's role as a portfolio diversifier. Historically, this has tended to be associated with strong gold performance.
[Figure 10: Market expects one more rate hike before year-end and 2.4 more hikes in 2027]
[Figure 11: Gold tends to perform well in a stagflationary environment]
VII. Positioning and Technical Levels Matter for the Timing and Magnitude of Moves
CTA and systematic investors contributed significantly to gold price volatility in 2026.
CFTC positioning data shows that net longs peaked in January, then remained near 3-year lows in Q2 and early Q3. Since then we have seen some recovery, mainly concentrated in August, but the more interesting development is the divergence between managed money and other reportable positions.
The World Gold Council links other reportable positions to CTAs, which can abruptly change direction and amplify up and down moves.
Managed money net longs bottomed in May when gold hit $4,000/oz, but other reportable positions did not begin to rise until late July.
This coincided with gold's rapid breakout above $4,600/oz, showing how price action was amplified.
Net positioning in other reportable positions remained broadly stable in September and early October, and with shorts already near historic lows, any meaningful recovery would require fresh CTA buying rather than short covering.
[Figure 12: CFTC data shows other reportable positions have been adding longs since late July, though the pace of accumulation slowed in September]
Technical levels also matter: gold is currently trading below key technical levels after failing to meaningfully break above its 200-day moving average in August. The spread between these technical levels has also narrowed significantly since March, with the gap between the lowest and highest moving averages at only about $270/oz.
The moving averages have also crossed multiple times, with the 50-day and 100-day MAs currently about $80/oz apart. If trend signals across different timeframes begin to realign, this compressed setup could signal a decisive directional move.
Since many CTA models are built around these signals, a recovery toward the 200-day MA could bring a new upward trend, while a break below the year's lows could bring a new wave of selling.
With this week's US CPI data release, the October 28 Fed decision, and the November 4 refunding announcement approaching, systematic flows are likely to amplify gold's next move.
[Figure 13: Gold trading below key technical levels]
VIII. Gold Outlook: Resilient
Against an increasingly challenging macro backdrop, gold has shown resilience, supported by strong central bank demand and ETF inflows.
Central bank buying appears to have accelerated in Q3, posing upside risk to our full-year forecast of 800 tonnes, while ETF additions of about 250 tonnes year-to-date occurred mostly in Q3, despite the Fed implementing its first rate hike since 2023 during the period.
We believe this reflects gold's growing appeal as a hedge against geopolitical risk and concerns about government debt sustainability.
With gold prices repeatedly finding support near $4,000/oz, we view the current risk-reward as attractive, with a target of $5,000/oz by Q2 2027.
Lower yields offer the clearest path higher.
Falling bond yields and/or oil prices could moderate Fed tightening expectations, lower the cost of holding gold, and encourage new investment inflows.
However, if further increases in long-term yields are driven by fiscal sustainability concerns, this is not necessarily bearish—it would encourage diversification into real assets like gold that carry no credit risk.
Similarly, while rising oil prices may initially weigh on gold through higher rate expectations, sustained strength could ultimately shift market focus toward growth and stagflation, creating another source of support.