(Kitco News) - Gold prices are struggling to hold gains above critical near-term support at $4,300 an ounce as renewed momentum in the U.S. dollar and elevated bond yields continue to take their toll on the precious metal.
Gold prices have dropped below $4,300 and are currently trading at $4,279.80 an ounce, down close to 2% on the day.
Despite the renewed selling pressures, one bank continues to see underlying resilience in gold even as the yellow metal faces rising opportunity costs after the Federal Reserve embarked on a new tightening cycle last week.
In their latest precious metals note, commodity analysts at BMO Capital Markets pointed out that investment demand has remained relatively robust as investors continue to hedge against debasement-related themes and concerns surrounding U.S. fiscal sustainability.
At the same time, they noted that renewed global physical demand is providing fresh support for gold.
“Physical demand appears to be strengthening, with India's local market discount continuing to narrow amid resilient wedding-related demand, while Chinese imports, ETF buying and futures activity all point to healthy underlying investment demand,” the analysts said.
BMO said gold’s recent performance is particularly notable given the significant macroeconomic headwinds facing the precious metal. The U.S. dollar and 10-year Treasury yields have both moved sharply higher since last week’s Federal Reserve meeting, but gold has remained relatively stable between $4,300 and $4,400 an ounce after falling in the days leading up to the rate hike.
Looking ahead, BMO Economics expects the central bank to raise rates by another 25 basis points before the end of the year.
Nevertheless, the analysts said gold’s ability to withstand higher rates is another indication that its traditional relationship with bond yields is weakening.
“Gold's resilience despite this continues to highlight the growing disconnect between gold and opportunity costs, with speculative and official sector demand providing a major counteracting force,” the analysts said.
According to BMO, investment demand is playing an important role in that disconnect. Global gold-backed exchange-traded funds attracted $4.2 billion in inflows over the past week, bringing total holdings close to levels seen before the Middle East conflict.
North American-listed funds led the buying with $2.2 billion in inflows, followed by $1.1 billion in Europe and $637 million in China.
BMO said the broad-based buying points to growing investor interest in protecting portfolios against currency debasement and concerns surrounding the sustainability of U.S. government finances.
The latest investment flows also reinforce a theme BMO highlighted earlier this year. In its June commodity outlook, the bank argued that gold was increasingly benefiting from two forms of de-dollarization: geopolitical efforts to reduce exposure to the U.S. dollar and demand for gold as a hedge against potential monetary debasement stemming from rising sovereign debt.
While investment demand remains a major pillar of support, BMO said improving physical consumption could provide another important floor under prices.
In India, the world’s second-largest gold-consuming market, demand has remained relatively resilient despite historically elevated prices as the country enters its peak festive and wedding season. The analysts noted that consumers continue to buy gold but are increasingly shifting toward lighter-weight jewelry.
BMO said India’s discount to the London gold price has narrowed by a further $20 an ounce over the past two weeks, another indication that physical demand is improving.
Meanwhile, Chinese demand remains another source of strength.
BMO said China’s net imports of non-monetary gold rose 48% from a year earlier to 124.5 tonnes in August. Although the pace of growth slowed compared with the second quarter, cumulative imports through August have already surpassed the total recorded during all of 2025.
Investment demand within China has also remained healthy. Chinese gold ETFs added roughly 44 tonnes through August, while average daily gold futures volumes on the Shanghai Futures Exchange rose 36% month-over-month to 396 tonnes per day.
At the same time, net-long positions held by the top 20 market participants increased by 37 tonnes from July to 154 tonnes, providing further evidence of strong domestic investor participation.
The improving physical and investment backdrop comes as BMO maintains a relatively cautious near-term outlook for gold because of tighter monetary policy. In June, the bank lowered its forecast and said it expected gold to average $4,625 an ounce during the second half of 2026, while still forecasting prices to push back above $5,000 in the first quarter of 2027.
For now, BMO said investors will be watching U.S.-China talks and next week’s core Personal Consumption Expenditures inflation report. The bank said developments surrounding trade could influence expectations for tariff-driven inflation and global economic growth, while the inflation data could provide the next major signal on whether the Federal Reserve will need to tighten monetary policy further.
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