Gold prices fell below $4,200 per ounce early this week, as surging bond yields, a stronger dollar, and a technical breakdown together triggered a fresh round of selling.

At the same time, gold ETF holdings continued to rise, signaling that some investors have not exited this market.

Ole Hansen, head of commodity strategy at Saxo Bank, said the core contradiction facing gold right now is that rising interest rates are eroding the appeal of holding a non-yielding asset, but higher rates are also intensifying pressure on the fiscal and financial system.

Hansen noted that the U.S. 10-year real yield has climbed to an 18-year high of nearly 2.85%, and the short-term rate market is currently pricing three more Fed rate hikes of 25 basis points each through next April.

"The weakness in gold reflects surging bond yields, a stronger dollar and technical selling after support was broken, possibly amplified by Chinese investors taking profits ahead of Golden Week," Hansen wrote.

ETF Flows Become a Key Support

Gold still has one signal that runs counter to the rate trend: real yields keep rising, but gold ETF holdings continue to increase.

Hansen believes this shows some investors are more focused on the financial and fiscal risks that high funding costs could bring, rather than simply comparing the yield gap between gold and bonds.

"The key question is whether this demand can persist. So the focus will remain on ETF flows, especially from investors who appear less sensitive to rates and more worried about the financial consequences of persistently high borrowing costs," he said.

But higher rates are also putting pressure on the corporate financing market.

Hansen pointed out that stress signs have already appeared in the weaker end of U.S. corporate credit, with triple-C bond spreads widening notably, and the gap with B-rated debt reaching levels previously associated with major economic slowdowns.

The spread between U.S. high-yield corporate bonds and Treasuries widened by another 12 basis points on Friday to 294 basis points, the highest since April.

If financing stress continues to spread, investors may need to sell their most liquid assets to meet cash needs such as margin calls.

Hansen believes gold's large market size and high liquidity could actually make it a source of cash raising.

"The financial and fiscal pressure caused by higher yields may strengthen the long-term investment case for gold, while a severe liquidity crunch could initially trigger selling and weigh on prices," he said.

Low U.S. Stock Volatility Temporarily Gives Gold a Buffer

Joy Yang, global head of index product management at MarketVector Indexes, also believes gold has recently shown some resilience.

In an interview with Kitco News, she said that despite the sharp rise in U.S. Treasury yields, stock market volatility remains at a low level.

The VIX recently traded around 15, while gold prices still held initial support above $4,150 per ounce.

"I think gold's relative resistance also reflects the low volatility in the stock market," Yang said.

She believes both stock and gold investors are now watching whether high inflation will persist and whether the latest oil price shock can continue.

Some investors may be using gold to hedge these risks.

Since September, gold ETF flows have remained strong.

Yang believes this reflects that some investors are changing how they view gold: it is no longer just an asset competing with bonds on yield, but is also used to hedge broader macro risks.

But this demand does not mean gold cannot keep falling.

Yang pointed out that if the market truly enters a phase of scrambling for cash, gold ETF investors could also sell gold, and gold could then see outflows alongside stocks.

She does not believe gold prices will return to the lower ranges of past years, but instead thinks uncertainty from debt, geopolitics, sanctions and supply shocks could keep gold in a higher structural range.

"I do not really see a breakout, but I also do not think gold will fall back to last year's or even two years ago's levels," Yang said.

Natixis: It Could Fall to $4,100 by Year-End, or Break Above $5,250

Bernard Dahdah, precious metals analyst at Natixis, offered a much wider price range.

The bank's latest report laid out three scenarios, corresponding to gold falling toward $4,100 by year-end, dropping to $3,500 in an extreme case, and breaking above $5,250 if inflation falls quickly and forces the Fed to pivot.

This marks a clear change from Natixis' judgment at the end of August.

At that time, Dahdah had raised his year-end gold target to $5,000, mainly based on safe-haven demand from U.S. debt and bond market instability.

But over the past month, the relationship between gold and oil prices has turned negative again.

Natixis believes higher crude oil prices intensify inflation pressure, which in turn raises expectations for further Fed rate hikes and lifts the opportunity cost of holding gold.

The bank also noted that the correlation between gold and the U.S. 10-year Treasury yield has reappeared since the end of August, while the relationship between gold and the dollar index has been relatively stable this year.

Even as gold prices fall, physically backed gold ETF holdings are still increasing.

Dahdah said: "Some investors are buying the dip (in ETFs), but structural demand cannot offset the rate-driven repricing."

Central bank demand is also a variable.

Previously strong official-sector gold buying helped gold withstand high bond yields, but Natixis believes that if oil prices stay high and the dollar remains strong, some central banks may prioritize curbing inflation and supporting their currencies rather than continuing to increase gold reserves.

In the base case, Natixis expects the Fed may hike again in December, gold prices will remain under pressure for the rest of 2026, and fall toward $4,100 by year-end.

If the Fed keeps rates unchanged in 2027, de-dollarization, a recovery in investor demand and central bank gold buying could push gold to about $4,750 by the end of next year.

In the pessimistic scenario, if the Middle East situation escalates further and leads to the closure of the Strait of Hormuz, oil prices could rise further, inflation could stay high, and the Fed would need to keep rates high for longer.

If at the same time central banks shift from gold buyers to net sellers to release reserves and support their currencies, Natixis believes gold could fall to $3,500.

The other scenario is the exact opposite.

If the Strait of Hormuz returns to normal, oil prices fall sharply and accelerate disinflation, the Fed may gain room to shift toward easing.

In that scenario, Natixis believes gold prices would stabilize above $5,250.