Gold is down more than 20% from its record — has the safe-haven trade broken?

Gold is behaving in a way that seems counterintuitive. Inflation remains elevated, geopolitical tensions are still affecting energy markets, and the Federal Reserve has resumed raising interest rates, yet gold is trading around US$4,300 an ounce, roughly 22% below the record US$5,594.82 reached in January.

That decline challenges the simple idea that inflation or uncertainty should automatically push gold higher. The metal is still attracting defensive demand, but it is competing against government bonds offering yields near levels not seen in almost two decades. When investors can earn around 5% on US Treasuries, the opportunity cost of holding an asset that pays no income rises sharply.

The Federal Reserve has added to that pressure by lifting its target rate to 3.75%–4.00% and signalling that another increase could follow before the end of 2026. Sixteen of 18 policymakers expect at least one more hike this year, while inflation remains well above the Fed’s 2% target.

Gold’s current weakness therefore says less about the disappearance of safe-haven demand than about the strength of the competing forces working against it.

Spot gold was around US$4,295 an ounce on September 24, down roughly 22% from January’s peak. The pullback has persisted despite renewed inflation concerns, a stronger oil market and a geopolitical environment that would traditionally be considered supportive for defensive assets.

The problem for gold is the way central banks are responding to those pressures. Higher oil prices and stronger domestic demand have reinforced expectations that interest rates will remain elevated, while Fed officials continue to describe inflation as too high across a broad range of categories. Richmond Fed President Tom Barkin said this week that inflation was being sustained by consumer demand and wider economic momentum rather than energy and tariffs alone.

Gold is therefore being pulled in opposite directions. Inflation and geopolitical risk are still encouraging investors to own the metal, while higher interest rates and stronger bond yields are limiting how much that demand translates into price gains.

For Australian traders, that creates a more balanced setup than simply treating gold as an inflation hedge. CFDs can provide long or short exposure as changes in rates, yields, the US dollar and geopolitical risk alter the relative appeal of the metal.

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Gold has a long history as a store of value because its supply cannot be expanded as easily as fiat currency. Over very long periods, that scarcity can help protect purchasing power, but short-term price movements depend heavily on how monetary policy responds to inflation.

When inflation rises while interest rates remain low, real yields fall, and the income available from cash and government bonds becomes less attractive after adjusting for price increases. Gold can perform strongly in that environment because investors give up little income by holding it.

The current cycle looks very different. The Fed has started tightening again, and policymakers expect another increase before year-end as inflation remains persistent. Higher nominal rates combined with elevated bond yields have increased the return available on lower-risk assets, reducing the incentive to hold non-yielding gold purely as an inflation hedge.

Gold can therefore fall during an inflationary period if investors believe central banks will respond aggressively enough to protect the value of money. Inflation alone is not the driver; the level of real yields and the expected policy response are often more important.

US government bonds have become a much stronger competitor for defensive capital. Benchmark Treasury yields reached their highest levels since 2007 in September as investors priced further rate increases and became more concerned about inflation and the US fiscal outlook.

That changes the comparison facing investors. Gold provides no coupon and no dividend, while Treasuries offer a contractual income stream backed by the US government. Investors seeking protection no longer need to choose between near-zero cash returns and gold; they can earn substantial nominal yields while holding highly liquid government debt.

The stronger US dollar adds another headwind. Gold is priced in dollars, so a rising currency makes it more expensive for buyers using other currencies. The dollar strengthened after the Fed’s September hike as markets increased expectations for further tightening, adding another source of pressure on bullion.

Those forces help explain why gold has struggled even during periods of geopolitical stress. Investors may still want protection, but bonds and cash have become much more credible alternatives.

The price decline has not been accompanied by a collapse in investor interest. Global physically backed gold ETFs attracted US$18 billion of inflows in August, the second-largest monthly total on record, while holdings increased by 121 tonnes to a record 4,189 tonnes. Assets under management rose to US$615 billion.

That demand provides an important counterpoint to the 22% drawdown. Institutional and individual investors are still allocating capital to gold even though the price remains far below January’s peak, suggesting the metal continues to play a role as portfolio insurance.

The gap between strong ETF demand and weaker prices also illustrates why flows alone do not determine direction. New buying can support the market while other investors reduce exposure, central banks slow purchases or higher yields attract capital elsewhere. The World Gold Council reported that North American and European investors returned strongly to gold ETFs in August, but the broader macro environment remains dominated by opportunity cost.

Gold’s safe-haven status therefore looks weakened rather than broken. Investors still want the asset, but they are demanding more compensation before choosing it over yield-bearing alternatives.

Gold’s strongest catalyst would likely come from a shift in the rates outlook rather than another increase in headline inflation. If growth slows or inflation begins falling, expectations for additional Fed tightening would weaken and Treasury yields could retreat.

The relationship was visible earlier in August, when lower bond yields helped gold climb to a seven-week high above US$4,250. The move coincided with easing geopolitical tensions and softer rate expectations, showing how quickly gold can respond when the opportunity cost of holding it falls.

The opposite scenario would keep pressure on the metal. Strong economic data, persistent inflation and further Fed tightening would support high real yields and the dollar, forcing gold to compete against assets offering increasingly attractive income.

Recent US economic data remain strong enough to keep that risk alive. Fed officials continue to describe inflation as broad-based, while markets have maintained expectations for further tightening after September’s hike.

US Treasury yields remain one of the clearest signals for gold. A sustained move higher would continue increasing the opportunity cost of holding bullion, while falling yields could provide relief even if inflation remains elevated.

Fed guidance will also remain central. Markets are already pricing additional tightening, so any reduction in those expectations could weaken the dollar and improve gold’s relative appeal. ETF flows provide a separate measure of underlying investor demand, with record August holdings showing that institutional interest has remained strong despite the correction.

Oil adds another variable because it influences both inflation and geopolitical risk. Falling energy prices could remove some safe-haven demand but also reduce the pressure for higher interest rates, leaving the net effect dependent on how bond yields respond.

Trading gold with Mitrade

Gold’s fall from its January record shows why inflation, geopolitical risk and safe-haven demand do not always point in the same direction. Interest rates, bond yields and the US dollar can outweigh those supports for extended periods, creating opportunities on both sides of the market.

Through Mitrade, eligible Australian clients can use CFDs to take long positions when expecting gold to rise or short positions when expecting further weakness. Stop-loss and take-profit orders can be used to define exit levels, while pending orders allow positions to open only if a selected price is reached.

Accounts can be funded in AUD, and a demo account is available for testing trading strategies without committing real capital. Mitrade is regulated in Australia by ASIC, while CFDs are leveraged products that can magnify both gains and losses.

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