Gold Falls to Lowest Since August as Yields Hit Two-Decade High, Though China Keeps Buying

The dollar index rose 0.4%, making gold more expensive for investors using other currencies and reducing international demand. At the same time, the yield on 10-year U.S. Treasury bonds reached its highest level in more than two decades. Higher yields increase the opportunity cost of holding gold, which does not generate interest income, making government bonds relatively more attractive.

Expectations of further Federal Reserve tightening added to the pressure. Markets largely expected the Fed to leave rates unchanged in October, but still priced in an 85% probability of a rate increase in December. Kansas City Fed President Jeff Schmid said further hikes might be necessary to bring inflation under control, while San Francisco Fed President Mary Daly emphasized that the policy path would depend on how inflationary pressures develop.

The September FOMC minutes revealed divisions among policymakers over the need for higher rates. Some officials viewed rate increases as necessary to contain inflation caused by energy and other price shocks, while more hawkish policymakers focused on preventing demand-driven inflation. This uncertainty has kept markets focused on the possibility that monetary policy will remain restrictive, supporting the dollar and Treasury yields and weighing on gold.

However, central-bank demand continued to provide support. China's central bank increased its gold purchases in September, extending its buying streak to 23 consecutive months. Continued official-sector purchases can help cushion price declines by creating demand independent of short-term interest-rate expectations.

Despite the sell-off, market strategists saw the possibility of a further decline toward $4,000 before a potential recovery later in the year. Such a rebound would depend partly on whether central-bank demand remains strong and whether expectations for future rate increases ease.