Against the backdrop of renewed strength in the US dollar and peRSIstently high US Treasury yields, gold is struggling to defend the critical near-term support level of $4300 per ounce. Spot gold has recently broken below $4300, trading at $4279.80 per ounce with an intraday decline of nearly 2%.
Although short-term selling pressure has flared up again, BMO Capital Markets still believes that the underlying demand for gold has not weakened significantly. Commodity analysts at the bank noted that investment demand remains relatively robust, as investors continue to use gold to hedge against themes related to currency devaluation and concerns over US fiscal sustainability.
Dollar and Yields Weigh on Gold Prices
BMO stated that gold’s recent performance deserves particular attention, as the macro headwinds facing gold have intensified markedly after the Federal Reserve launched a new round of tightening cycle last week. Since the Fed meeting last week, both the US dollar and 10-year US Treasury yields have risen sharply. However, after pulling back from highs in the days before the rate hike, gold has largely remained within the range of $4300 to $4400 per ounce.
Looking ahead, BMO’s economics team expects the Federal Reserve to raise interest rates by another 25 bASIs points before the end of this year. The bank also believes gold can demonstrate resilience in a higher-rate environment, indicating the traditional relationship between gold and bond yields is weakening.
Analysts said gold’s resilience amid high interest rates highlights a deepening "decoupling" from holding costs, while speculative and official-sector demand are forming an important hedging force.
Massive Inflows into Gold ETFs
In BMO’s view, investment demand is a major pillar behind this decoupling phenomenon. Over the past week, global gold ETFs attracted $4.2 billion in capital inflows, bringing total holdings close to levels before the outbreak of the Middle East conflict.
Among them, North American-listed funds led the way with net inflows of $2.2 billion; European markets recorded net inflows of $1.1 billion; and the Chinese market saw net inflows of $637 million. BMO believes such broad buying shows investors are increASIngly viewing gold as a tool to hedge against currency devaluation and risks to the fiscal sustainability of the US government.
The bank also pointed out the latest capital inflows continue a main theme it emphASIzed earlier this year: gold is benefiting from two types of de-dollarization demand. One is geopolitically driven efforts to reduce exposure to the US dollar, and the other is gold allocation demand arising as sovereign debt rises and markets seek hedges against potential currency devaluation.
Recovery in Physical Demand from India and China
Besides investment demand, BMO believes improving physical consumption may provide another layer of support for gold prices. As the world’s second-largest gold consumer, India’s demand remains relatively firm despite historically high gold prices, and the country is now entering its festive and wedding season. Analysts said consumers are still buying gold but are increASIngly opting for lighter-weight jewelry.
BMO said over the past two weeks, the discount of Indian gold relative to London gold narrowed further by $20 per ounce, another sign of improving physical demand.
Chinese demand also offers support. BMO stated that China’s net imports of non-monetary gold in August rose 48% year-on-year to 124.5 tonnes. Although the growth rate slowed compared with the second quarter, cumulative imports up to August have exceeded the total for the full year 2025.
Investment demand within China also stays active. Data shows that as of August, China’s gold ETFs added roughly 44 tonnes in total holdings. The average daily trading volume of gold futures on the Shanghai Futures Exchange rose 36% month-on-month to 396 tonnes per day. Meanwhile, the net long positions held by the top 20 market participants increased by 37 tonnes from July to 154 tonnes, further proving high participation among domestic investors.
Focus on China-US Negotiations and PCE Data Going Forward
Against the backdrop of improving physical and investment demand, BMO remains relatively cautious about gold’s short-term outlook due to tightening monetary policy. The bank cut its forecast in June, expecting gold to average $4625 per ounce in the second half of 2026, but still projects gold to climb back above $5000 per ounce in the first quarter of 2027.
Next, investors will keep a close eye on progress in China-US negotiations and the US core personal consumption expenditures (PCE) price index to be released next week. BMO said trade-related developments may affect market expectations for tariff-driven inflation and global economic growth, while inflation data may serve as the next key clue to judge whether the Federal Reserve needs further monetary policy tightening.
As the US dollar and US Treasury yields continue to disturb the gold market, whether gold can re-establish a foothold above $4300 will still depend on the tug-of-war between macro pressures and physical and investment buying.