Ole Hansen, Head of Commodity Strategy at Saxo Bank, stated that gold prices are facing an increASIngly severe test after breaking below $4230. Surging US Treasury yields, a stronger US dollar and technical selling triggered by the breach of key support levels have combined to weigh on gold again. Currently, exchange-traded fund (ETF) demand remains the primary force capable of offsetting such pressure.
In his latest precious metals analysis, Hansen noted that gold’s price action early this week demonstrates a rigorous test of whether this non-yielding asset can sustain investment demand amid elevated bond yields. He believes the recent weakness reflects a combination of multiple factors: rising bond yields, a stronger US dollar and technical liquidation after support levels were broken. In addition, profit-taking by Chinese investors ahead of the Golden Week holiday may have amplified selling pressure.
"Interest rate pressure is becoming harder to ignore," Hansen wrote. The US 10-year real yield has climbed close to an 18-year high of 2.85%, and short-rate markets are now pricing in three additional 25-bASIs-point Fed rate hikes by April next year.
ETF Demand Becomes the Key Variable
Hansen pointed out that historically, a rapid rise in the opportunity cost of holding non-yielding assets such as gold usually creates substantial headwinds for bullion prices. Nevertheless, the current chart reveals an important divergence: gold ETF holdings are still recovering even as real yields keep climbing.
He said the critical question is whether this demand can peRSIst. The market will closely monitor ETF capital flows, especially from investors who are less sensitive to interest rates but more concerned about the financial consequences of peRSIstently high borrowing costs.
Hansen also emphASIzed that higher yields suppress gold via traditional valuation channels on one hand, while increASIng fiscal pressure and debt servicing costs on the other. This may strengthen long-term demand for gold as a hedge against financial and sovereign risks.
Credit Stress May Trigger Liquidity Sell-offs First
However, he warned that financing pressure could also act as a headwind for gold in the short run. As interest rates rise, corporate refinancing risks grow, and signs of stress have emerged in the weaker segment of the US corporate credit market. Spreads on triple-C bonds have widened sharply, and the spread between triple-C and B-rated bonds has reached levels typically associated with major economic slowdowns.
More broadly, the spread between US high-yield corporate bonds and US Treasuries widened another 12 bASIs points last Friday to 294 bASIs points, the highest level since April.
Hansen warned that if such stress intensifies further, investors may turn to the most liquid assets to raise cash to meet margin calls and other liquidity needs. Thanks to its deep market depth and high liquidity, gold will likely become one of the eASIest assets to sell under such circumstances.
"This creates an important short-term paradox: financial and fiscal pressure brought by higher yields may reinforce the long-term investment case for gold, yet if an acute liquidity crunch emerges, gold prices may initially come under pressure from liquidations," Hansen said.
He concluded that for now, the sharp rise in real yields and Monday’s technical breakdown mean gold’s resilience is undergoing its toughest test to date.