Global gold prices fell sharply in September as US bond yields surged and the dollar strengthened. Yet gold-backed exchange-traded funds (ETFs) continued to attract strong inflows. Some investors were selling, while others, including central banks, were adding to their holdings. The textbook explains the price decline, but not the continued buying.

The question is whether investors are reading different signals in the same market. For some, higher yields make gold less attractive. For others, the factors driving yields higher may be a reason to buy it.

This divergence challenges the conventional view that rising yields invariably hurt gold. Since bullion pays no interest, higher bond yields increase the opportunity cost of holding it. But focusing solely on yields risks overlooking other forces shaping demand.

Two Sides of the Market
Global gold ETFs attracted 67 tonnes, worth about $10 billion, in September, even as prices fell 8.5%, according to the World Gold Council’s latest report. Quarterly inflows reached a record $31 billion, with global ETF holdings increasing by 211 tonnes. UK-listed gold ETFs attracted 54 tonnes in the third quarter, an all-time high for a three-month period.

The UK figures are particularly striking. The World Gold Council’s model, based on the previous five-year relationship between UK and Western ETF flows, estimated quarterly inflows of around 18 tonnes. The actual figure was three times that estimate, suggesting that traditional drivers may not fully explain investor demand.

This is not simply a case of investors ignoring falling prices. Price corrections have often prompted withdrawals from gold ETFs, reflecting investor nervousness. This time, demand has remained strong. Some investors may believe gold offers protection against longer-term uncertainty, while changes in interest-rate expectations are more temporary.

The reasons for selling, meanwhile, are relatively straightforward. The US 10-year Treasury yield climbed 53 basis points to 5.3% in September, while the dollar index gained around 2%, according to the WGC. Both contributed to gold’s decline. Speculators also reduced their net-long positions in the US futures market by the equivalent of 84 tonnes.

These factors explain why some investors sold. They do not fully explain why others continued buying.

The latter group may view gold as a long-term portfolio diversifier, particularly amid concerns about public finances, persistent inflation and rising government debt. Geopolitical risks have added another dimension since Russia’s invasion of Ukraine in 2022. The West’s freezing of Russian central bank reserves raised questions about the accessibility of overseas assets during a crisis.

Central banks, particularly in emerging markets, have been important gold buyers since 2022. According to a Reuters report, Bundesbank President Joachim Nagel recently said rising yields made bonds relatively more attractive to reserve managers, but high debt levels and geopolitical tensions could strengthen the case for diversifying into gold. Bank of Italy Deputy Governor Sergio Nicoletti Altimari also reportedly said concerns over public debt and fiscal expansion had weakened gold’s traditional inverse relationship with real bond yields.

The WGC’s October report offers another clue. French government bond term premiums have reached their highest levels since the early 2000s, raising concerns about public debt sustainability. For some investors, rising yields may therefore signal not just better returns on bonds, but also the financial risks that make gold worth holding.

Central bank reserve decisions and ETF investments should not be viewed through the same lens. Their motivations differ, and not every ETF inflow signals a loss of confidence in government bonds. Together, however, they show why gold’s appeal cannot be understood solely through the opportunity cost of holding it. Investors also weigh the alternatives available to them and the severity of the financial and geopolitical risks they face.

Beyond Yields
In the near term, conventional drivers will continue to influence gold prices. US inflation data and other economic indicators will shape expectations for the Federal Reserve’s next move, affecting interest rates, the dollar and bond yields. But these factors need to be assessed alongside the fiscal and geopolitical risks influencing longer-term demand.

For Indian buyers, the picture is somewhat different. A weaker rupee has supported domestic gold prices, offsetting some of the weakness in global markets. The earlier increase in gold import duty from 6% to 15% has also kept local prices higher than they would otherwise have been. This could weigh on festive-season purchases. Indian households typically allocate a budget for gold, meaning higher prices can translate into lower volumes bought.

It is therefore difficult to conclude that gold prices must fall whenever bond yields rise, or that the traditional relationship has broken down. The more important question is whether yields alone can explain investment demand in a market shaped by multiple, competing risks.

The recent divergence may reflect less a breakdown in gold’s traditional drivers than the different purposes for which investors hold the metal. Short-term traders may sell as yields rise, while longer-term holders buy because they value gold’s diversification and protection benefits.

That makes the next price move harder to predict: the direction will depend on which forces dominate, not on yields alone.

Understanding gold’s next move requires looking beyond rising yields to the risks investors are trying to manage. The old rules still work. They simply no longer tell the whole story.