Globally, gold gave up roughly 7% across September. Australian buyers felt less of the fall, with the local price down closer to 4% as our dollar weakened over the same month. Gold is still trading a little higher than it was this time last year.
So what changed? For the most part, the answer sits in the US bond market.
When bonds fall, yields rise
Bond prices and bond yields move in opposite directions. When investors sell government bonds, prices drop and the interest return locked in by new buyers goes up.
That is what’s happening now. The 10-year US Treasury yield has pushed above 5.2%, while the 30-year has moved above 5.6%. The market hasn’t seen either level since 2002.
Three forces are behind it. Oil prices remain elevated as conflict in the Middle East continues to disrupt energy supply, which keeps inflation fears alive. The US Federal Reserve has responded by lifting interest rates for the first time since 2023, and markets are weighing the chance of another increase this month. And investors are increasingly asking for a higher return before lending to a US government carrying record levels of debt.
A 5% competitor
Gold earns no interest. When rates are low, that barely matters. When a US government bond pays more than 5% a year, it matters a great deal more.
Consider A$10,000. Converted into US dollars and placed in a 10-year Treasury at current rates, it would earn the equivalent of around A$520 a year in interest, before any movement in the exchange rate. The same A$10,000 held in gold earns nothing, and its return depends entirely on what the price does. The higher bond yields climb, the more some investors question holding an asset that doesn’t pay them to wait.
A firmer US dollar has added to the pressure. Because gold is priced globally in US dollars, a stronger greenback makes it more expensive for buyers using other currencies, which can soften demand.
Not the whole story
A difficult month doesn’t erase the bigger picture. Late-September US inflation data came in slightly softer than expected, which eased some of the expectation of another rate rise. And central banks, among gold‘s most consistent buyers in recent years, roughly doubled their purchasing pace in the first half of this decade compared with the five years before.
The debt connection
There’s an irony worth noticing here. We recently looked at what Australia’s trillion-dollar government debt actually looks like. In the United States, the same issue on a far larger scale is now helping push bond yields higher.
Governments that borrow heavily rely on investors being willing to buy their bonds. When those investors become more cautious about inflation, or about the sheer volume of debt being issued, they want to be paid more to lend. That higher payment is a higher yield.
In other words, one of the forces holding gold back right now is connected to the very thing that has underpinned long-term interest in gold: the growing weight of government debt.
A US government bond, often called a Treasury, is essentially a loan to the United States government. Investors hand over money today, and in return the government promises to pay regular interest and repay the original amount on a set date in the future.
Treasuries come in different lengths. Bills mature within a year, notes run from two to ten years, and bonds stretch out to 20 or 30 years. The 10-year note is the one most often quoted in the news, because it’s used as a benchmark for borrowing costs around the world, from mortgages to business loans.
US Treasuries are widely seen as one of the safest investments available, because they’re backed by the US government and traded in the largest bond market on earth. That’s what makes them gold‘s natural competitor during uncertain times. Both attract investors looking for safety. The key difference is that a bond is a promise to be paid back in dollars, while gold isn’t anyone’s promise at all.
Not all yields are equal
Headline bond yields are known as nominal yields. Many analysts pay closer attention to real yields, which subtract inflation from the headline rate. A 5% bond with inflation at 2% delivers a very different outcome from the same bond with inflation at 4%. Historically, gold has tended to respond more to changes in real yields than to nominal ones.
For Australian buyers, the exchange rate adds another layer. Because gold is priced globally in US dollars, what Australians pay also depends on the value of the Australian dollar. September was a good example. Gold fell around 7% in US dollar terms, but the Australian dollar also lost about 3% against the US dollar during the month, which cushioned the local price and limited the fall here to roughly 4%. That’s why gold in Australian dollars doesn’t always move in step with the headlines out of New York.
None of this means higher yields will keep gold lower, or that falling yields would guarantee a rise. Interest rates, currencies, inflation, central bank demand and global events all influence the price at once. Understanding why bond yields are moving, though, goes a long way toward explaining why gold is behaving the way it is.
Disclosure: This article is provided for general information and educational purposes only and does not constitute financial advice. Markets can move quickly and past performance is not a reliable indicator of future results. Always conduct your own research and consider your personal circumstances before making investment decisions.
