How rising US bond yields and dollar recovery is weighing on gold

Gold has come under renewed selling pressure following the latest monetary tightening by the US Federal Reserve, as rising Treasury yields and a sharp recovery in the US dollar reduced the appeal of the non-yielding precious metal. On September 16, the Fed raised its benchmark interest rate by 25 basis points to 3.75-4.00 percent, its first rate increase in more than three years.

The impact has been particularly visible in financial markets. The benchmark 10-year US Treasury yield recently moved towards 5.25 percent, its highest level since 2007, while the Dollar Index recovered above the 101 mark. Together, higher yields and a stronger dollar have outweighed some of the support gold would typically receive from heightened geopolitical uncertainty.

Strong Dollar and Higher Yields Create a Double Headwind

The shift in US interest-rate expectations has provided fresh momentum to the dollar. Higher US interest rates improve the relative attractiveness of dollar-denominated assets, encouraging global capital flows towards the greenback. This has helped the Dollar Index recover above 101, creating an additional challenge for gold.


At the same time, US Treasury yields have moved sharply higher as markets adjust to the possibility that interest rates could remain elevated for longer. Expectations of persistent inflation and potentially further policy tightening have contributed to the increase in both short- and long-term yields.

For gold, this combination is particularly challenging. A stronger dollar makes bullion more expensive for buyers using other currencies, while higher bond yields increase the opportunity cost of holding gold, which provides no regular interest income.

Why Rising Yields Matter for Gold

Gold generally has an inverse relationship with US real yields, particularly when inflation-adjusted returns on government bonds rise. When real yields increase, investors have greater incentive to hold interest-bearing securities rather than precious metals.

The World Gold Council has also identified higher real yields and changing expectations for US monetary policy as potential constraints on gold investment demand, particularly among Western exchange-traded funds. Therefore, unless yields ease from their current elevated levels, gold may find it difficult to stage another sustained rally.

However, this relationship is not absolute. During periods of severe economic, financial or geopolitical uncertainty, safe-haven demand can still support bullion even in a relatively high-yield environment.

Why West Asian Tensions Are Providing Limited Support

The relatively muted response of gold to escalating geopolitical tensions in West Asia may appear surprising, as such uncertainty usually generates strong safe-haven demand.

This time, however, the conflict is also keeping crude oil prices elevated. Higher energy prices add to inflationary risks, strengthening expectations that the Fed may have to maintain restrictive monetary conditions for longer. Consequently, geopolitics is working in two directions: uncertainty supports gold, while higher oil prices reinforce inflation, yields and interest-rate expectations.

At present, the latter factors appear to have a greater influence. Nevertheless, persistent geopolitical uncertainty should continue to provide a floor for bullion and limit the possibility of a deep correction.

Central-Bank Buying Offers Structural Support

Central-bank demand remains another important source of support. Central banks purchased a net 289 tonnes of gold during Q2 2026, compared with a revised 57 tonnes in the first quarter. Total purchases during the first half reached 345 tonnes.

Strategic accumulation is likely to continue despite higher global interest rates. Reserve diversification, geopolitical uncertainty and inflation hedging remain key reasons for central banks to maintain significant gold exposure. The World Gold Council expects central banks to remain notable buyers during the remainder of 2026, although annual purchases could finish below 2025 levels.

Outlook: Mild Positive Bias Towards Year-End

Gold is likely to remain caught between opposing forces over the rest of 2026. Elevated Treasury yields, a stronger dollar and the possibility of further Fed tightening could restrict significant upside. A sustained decline in bond yields or a clear shift towards easier US monetary policy may be necessary to trigger another major rally.

On the other hand, geopolitical uncertainty, persistent inflation concerns, central-bank accumulation and Asian investment demand should provide support on meaningful corrections. The World Gold Council expects investment demand to remain constructive during the second half, supported increasingly by Asian and OTC buying.

Overall, gold may retain a mild positive bias towards year-end, but the scope for either a major rally or a prolonged sell-off appears limited under current conditions. Prices could remain broadly range-bound with intermittent volatility, while US Treasury yields and the dollar are likely to remain the key triggers for gold's next major directional move.

(The author of the article is Hareesh V, Head of Commodity Research, Geojit Investments Limited)