Gold caught between central bank demand and real-yield pressure: Kotak Sec

Disclaimer: This article is written by Kaynat Chainwala, AVP, commodity research at Kotak Securities. Views expressed are his own. Readers' discretion is advised.

 

Gold is currently trading near $4,130, caught between two forces pulling in opposite directions. The structural demand case, anchored by persistent central bank accumulation and sustained ETF inflows, remains intact. The macro headwind, driven by real yields at their highest level since 2008 and a dollar near 18-month highs, has intensified in ways that go beyond what a standard rate-hike cycle would produce. Understanding why the current leg of the correction is different from what came before it matters more than the price level alone.

 

 

Gold's recent decline has unfolded in two distinct stages with meaningfully different drivers. The first leg saw prices fall from around $4,700 in late August to below $4,250 by mid-September, losing nearly 10 per cent in less than three weeks ahead of the FOMC meeting, as a series of firmer-than-expected inflation readings pushed September rate hike expectations close to certainty. Importantly, 10-year TIPS yields were broadly stable through this period, ranging between 2.32 per cent and 2.45 per cent, suggesting the initial leg lower was driven primarily by the shift in the Fed rate narrative rather than a structural rise in real yields.

 

The latest leg of the correction has been materially different. The 10-year TIPS yield stood at 2.46 per cent in early September and climbed steadily to around 2.95 per cent by the first week of October, its highest level since 2008, a move of roughly 50 basis points in under a month. More importantly, real yields have continued to rise even as October hike odds have collapsed below 20 per cent following a September payrolls print of just 29,000 against a consensus of 84,000 to 90,000, softer PCE data and a rising unemployment rate. The divergence between falling near-term hike probability and rising real yields is the defining feature of the current environment. Rising term premium, growing Treasury supply concerns and a broader repricing of the required return on US government debt appear to be playing an increasing role, creating a more persistent headwind for non-yielding assets than a standard rate-hike cycle would generate.

 

The dollar has amplified that pressure. The index pushed above 102 for the first time since April 2025, driven in part by euro weakness tied to France's budget deficit concerns and political uncertainty, reaching an 18-month high of 102.5 earlier this week. 10-year nominal Treasury yield reached 5.35 per cent, the highest since 2002.

 

Against that macro pressure, the structural demand picture continues to provide a floor that the rate narrative alone does not explain. The People's Bank of China extended its gold-buying streak to a 23rd consecutive month in September, with holdings rising to 77.47 million fine troy ounces. According to World Gold Council data, gross central bank purchases reached 595 tonnes in the January to August period, though net official sector buying has slowed to approximately 170 tonnes over the same period as some larger holders have begun liquidating portions of their reserves even as others continue multi-year accumulation programmes. The widening gap between gross and net buying is worth watching as a potential signal of shifting sovereign sentiment at the margin.

 

Global gold ETFs added more than 70 tonnes in September despite a 7 per cent decline in the metal’s price, marking a fifth consecutive month of inflows and extending a physically backed accumulation trend that began in May. August had already delivered one of the largest monthly ETF inflows on record. The persistence of buying through a sharp correction suggests the investment thesis behind these allocations is not purely momentum-driven. Based on World Gold Council flow data since 2004, September 2026 stands out as one of the few months to combine a price drop of this magnitude with inflows of this size, reinforcing that view.

 

FOMC minutes due tonight will be the next near-term catalyst, offering more clarity on how divided policymakers are on the path ahead following the weak jobs report. Gold attempted twice to recover above $4,200 on the soft payrolls and PCE data but could not hold the gains, underscoring that the market is not yet willing to price a sustained recovery on softer economic prints alone. With October hike odds already below 20 per cent, the mid-month CPI release may carry less directional weight for gold than it typically would, as the more consequential variable is not the near-term rate path but whether real yields show any credible sign of reversing. A break below $4,100 would expose further downside toward the $3,960 to $4,000 zone. Until that turn materialises, near-term price action is likely to remain driven by the rate market rather than the structural demand picture that central bank buying and ETF inflows represent. The two are pulling in opposite directions, and for now the macro is winning.

 

MCX Gold futures (Dec) are likely to remain sideways to mildly bearish in the near term as prices have slipped below the rising trendline and are trading below the key 150,987 level, while RSI at around 45 indicates weak momentum. Sustained trade below 150,987 could drag prices towards 146,815, followed by 145,630–144,800. On the upside, a decisive move above 151,970 would improve the technical setup and open the way towards 154,440. Overall, the bias remains cautious with 151,970 acting as the key resistance zone.