Why isn't gold falling further?

Gold has had plenty of reasons to be having a bad week. The Federal Reserve expectedly raised interest rates, with markets pricing in further tightening over the next 12months, whilst US Treasury yields continue to climb. Throw in the fact the dollar has just climbed to a seven-week high, for a non-yielding asset those are a set of fairly formidable headwinds.

Gold has certainly felt them as well, with the price slipping below the $4,300 level after trading above $4,400 earlier this month. But perhaps the more interesting question isn't why gold has fallen, it's why it hasn't fallen further given its still trading at the level it was at the close of 2025.

Higher interest rates have traditionally been bad news for gold. Gold doesn't pay a yield, so when cash and government bonds offer increasingly attractive returns, the opportunity cost of holding it rises. Higher US rates can also strengthen the dollar, making dollar-priced gold more expensive for buyers using other currencies, and right now, gold is dealing with both.

The Fed raised rates by 25 basis points last week, with markets already priced in three further rate increases. Meanwhile, hawkish comments from Boston Fed President Susan Collins helped push the dollar to a seven-week high this week, with markets currently putting roughly a 51% probability on another 25-basis-point increase at the Fed's October meeting.

Bond markets aren't offering much respite either. The US 10-year Treasury yield recently moved above 5%, increasing the competition gold faces from assets that actually pay their owners to hold them.

So, on paper, you could hardly design a more difficult backdrop for gold, yet the price remains around $4,300, with that resilience suggesting the other side of gold's equation may be becoming increasingly important.

For years, one of the simplest ways to think about gold was through real interest rates. Rates up, gold down. Rates down, gold up. But as we know, markets are rarely quite that obedient, with that simplistic relationship becoming evidently strained. This has become clear this week with both the dollar and Treasury yields moving sharply higher since the Fed meeting and interest rate decision, whilst gold has remained relatively stable.

Interestingly, the demand for gold has shown no signs of slowing down, with gold ETFs attracted $4.2 billion in the past week according to BMO Bank, with estimates there has been around 6.3 million ounces accumulated since July. There are also estimates that central banks have been buying close to 70 tonnes of gold per month on a three-month moving average, with the most noteworthy being China.

The People's Bank of China has now reported buying gold for 22 consecutive months, with official purchases accelerating to 20.2 tonnes in August - its largest monthly addition since October 2023. However, Goldman Sachs estimates that China have bought around 35 tonnes in July, roughly twice the publicly reported amount. Its analysis tracks gold moving through the London over-the-counter market into domestic vaults and custodians, allowing it to estimate purchases that may not yet appear in official reserve figures. That estimate needs treating as exactly that - an estimate rather than an official figure - but it raises an interesting question about just how much central-bank demand is sitting beneath the gold market.

China isn't alone either. Central banks reported net purchases of 23 tonnes in July, while World Gold Council data shows second-quarter central-bank demand reached 289 tonnes - five times the revised Q1 total and a record for a second quarter. Some central banks are even reconsidering where they keep their gold. The Dutch central bank recently shifted around 86 tonnes previously held in New York and Ottawa to London, saying the move would improve liquidity and strengthen its preparedness for severe crises.

With central banks being the largest purchaser of gold, its always important to keep an eye on how much they're buying and how they're acting with it.

There's another reason why today's combination of higher rates and a stronger dollar may not be having quite the effect on gold it once did. Investors aren't only asking what the dollar yields, but increasingly what it will be worth over the longer term.

Concerns over government borrowing, fiscal sustainability and the potential debasement of currencies have become an increasingly prominent part of the gold story. BMO says recent ETF demand partly reflects investors looking for protection against currency debasement and concerns about US government finances, while TD Securities points to similar concerns as one reason investment demand has remained resilient despite tighter monetary policy.

That creates an unusual tension of higher interest rates that make dollars and US government bonds more attractive today. But those same higher yields increase the cost of servicing an already substantial government debt burden. So the very thing creating one of gold's biggest short-term headwinds may also be contributing to one of its longer-term arguments.

None of this means gold can't fall further. The price has already dropped below $4,300 this week, and further rate rises, stronger economic data or another leg higher in the dollar could continue to put pressure on precious metals. BMO itself remains cautious in the near term because of tighter monetary policy.

But that's what makes the current market interesting. Gold doesn't have the wind behind it, it has the wind in its face, yet central banks are still buying, ETF demand has returned, geopolitical uncertainty remains elevated and concerns over debt and currency debasement haven't gone away.

Perhaps gold holding around $4,300 isn't remarkable in isolation, it what its holding it against that is remarkable. If some of gold's traditional headwinds are no longer producing the reaction they once did, the question isn't simply what could push gold lower from here, it's what happens when those headwinds eventually ease.