Gold Rises Again, But One Thing Warrants Caution

Gold prices moved back above US$4,200 per troy ounce in early trading on Monday (Oct 12), extending gains after rebounding from the previous week's pressure. This rise is notable as it occurs while markets remain overshadowed by expectations of high interest rates. According to market analysts, this rally is not merely a "buy-the-dip" reaction; it reflects shifting dynamics in two key factors: Treasury yields and inflation expectations.

Falling oil prices have served as a significant catalyst. While a prior surge in energy costs had stoked inflation fears and reinforced expectations of rate hikes, the recent correction in oil prices has offered the market some relief from that pressure. Should energy prices continue to soften, the risk of higher inflation could subside, thereby reducing the likelihood of central banks maintaining aggressive policies—an environment that typically favors gold.

The second factor involves US Treasury yields, particularly on long-term bonds. After spiking to multi-decade highs, yields have begun to retreat, providing breathing room for gold. Simply put, when yields fall, the opportunity cost of holding non-interest-bearing assets like gold decreases. Coupled with a weakening US dollar, this combination has made gold more attractive to investors once again.

However, analysts caution against immediately viewing this rebound as the start of a new rally. Geopolitical risks remain elevated following renewed Houthi attacks on Saudi Arabia, while US-Iran tensions have not fully abated. If these tensions drive oil prices back up, inflationary pressures could resurface, forcing the market to revive expectations of interest rate hikes. In such a scenario, yields and the dollar could strengthen again, weighing on gold.

For now, the US$4,200 mark is a critical level to watch. If gold can hold above this level—even if yields and the dollar face renewed upward pressure—it would signal a strengthening of buying interest. Conversely, if the price fails to hold this level and Treasury yields surge again, the rebound could prove to be merely a technical recovery. Thus, the primary focus lies not just on the price of gold, but on the US 10-year Treasury yield, the DXY, oil prices, and Federal Reserve interest rate expectations—factors that will determine whether this rally has the momentum to continue.