Gold has held its recent trading range even as bond yields climbed to multi-year highs, while gold ETFs continued to post net inflows. Kenny Zhu, head of research and investment strategy at Sprott, said the price action suggests investors remain divided on gold, although the bias is modestly upward. At the same time, central banks are gradually reducing their exposure to dollar assets and increasing gold reserves, creating a longer-term source of support.
Discussing portfolio allocation, Zhu said inflows into gold ETFs were less forceful than during gold's August rally but remained positive. In his view, gold's resilience in the face of rising yields, combined with continued inflows, indicates that some investors are considering building or increasing positions at current levels. He cautioned, however, that the available evidence does not point to a broad rush into precious metals.
Central Banks Shift Reserve Allocations
Zhu views central-bank gold purchases as a structural support for the market. He said the trend began before 2022 but accelerated after Russia's invasion of Ukraine and the sanctions that followed. The United States' removal of Russia from the international payments system highlighted the policy influence attached to the dollar and related financial infrastructure, prompting some central banks to reassess how their foreign-exchange reserves are allocated.
In Zhu's view, discussion of China reducing its holdings of U.S. Treasuries and moving into other assets is not new, with gold representing one possible alternative. Russia has also increased its gold allocation. Since then, buying by emerging-market central banks has drawn greater attention, as some developing economies adjust the balance between dollar assets and gold.
He added that even without geopolitical considerations, central banks may seek to reduce their concentration in U.S. assets and manage currency volatility through greater diversification. When the dollar strengthens, other currencies can come under pressure. For economies such as Turkey, where exchange-rate swings are more pronounced, those moves can create more immediate policy challenges. Gold and U.S. Treasuries may both be considered when central banks adjust their reserves.
Since 2022, gold's share of global central-bank reserves has increased, while the share of dollar-denominated assets has declined. Zhu stressed that this is not a sudden shift, although the change has accelerated in recent years. Continued adjustments in central-bank holdings provide a source of gold demand that is distinct from short-term trading activity.
Inflation Challenges Bonds as a Hedge
Rising bond yields typically increase the opportunity cost of holding gold because the metal does not pay interest. Zhu said, however, that investors also need to consider why yields are rising. If higher market rates mainly reflect inflation, declining purchasing power or concerns about government debt, gold's appeal may not be determined by yield levels alone.
Inflation reduces the real value of fixed-coupon bonds, he said. Even when investors hold bonds to maturity, persistent inflation can erode the purchasing power of future coupon payments. Bond prices can also come under pressure when market yields rise above the yields on bonds already held in a portfolio. Zhu described inflation as a major weakness for bonds and said they may not provide the hedge investors expect when price pressures increase.
He linked the inflation pressures of recent years to an accommodative monetary environment and increased liquidity. The Federal Reserve's slow pace of rate increases after an earlier period of near-zero interest rates may have allowed liquidity to remain abundant for longer than necessary, he said. Under that framework, the forces pushing yields higher reflect not only changes in interest rates, but also investors' assessment of inflation and the value of money.
Two Economic Paths for Gold
Looking ahead, Zhu outlined two possible scenarios. If the economy achieves a soft landing, the Federal Reserve may not need to raise rates aggressively and could adjust policy as economic data evolve. That could ease some of the pressure weighing on gold and allow the metal to return to a longer-term structural trend.
The alternative is an unexpected economic shock followed by a hard landing, prompting the Federal Reserve to make a substantial policy shift. If that shift reduces pressure from interest rates, both gold and silver could benefit, giving gold an additional lift. Zhu said either scenario could ease the current pressure on precious metals, but the actual effect will depend on economic data, the path of inflation and the Federal Reserve's response.
For now, multi-year-high yields remain a clear headwind for gold. Central-bank purchases, reserve diversification and continued net inflows into ETFs provide a counterweight. With those forces pulling in different directions, the market remains divided, but gold's price resilience and fund flows show that investors continue to assess the role of precious metals in portfolios.