Gold prices have experienced renewed strength following a recent pullback, with investors reassessing the metal’s appeal amid ongoing economic uncertainties and heightened inflation concerns. After dipping to around US$4,400 an ounce late last month, spot gold registered its strongest monthly performance since January, supported by underlying fiscal and geopolitical factors.

The metal had earlier found solid technical support near US$4,000 in June and July before surging as much as 16 percent in August. This rally occurred against a backdrop of escalating U.S. federal debt, which recently surpassed US$40 trillion, and increased Treasury bond buybacks aimed at managing government liabilities. Market participants have viewed these developments as fueling “debasement” trades in both gold and cryptocurrencies, given apprehensions over the value of fiat currency.

Despite rising yields on government bonds, which raise the opportunity cost of holding non-yielding assets like gold, the precious metal’s allure remains intact. The U.S. 30-year Treasury yield reached a two-decade peak at 5.34 percent last month, while Japan’s 10-year bond yield hit a 30-year high of 3 percent, and Australia’s 10-year yield recently climbed to a 15-year high of 5.19 percent. The U.S. 10-year yield also increased notably this year from 4.11 percent to 4.75 percent.

However, growing fiscal instability, high sovereign debt levels, and persistent inflation fears continue to underpin gold’s appeal. Market measures of inflation expectations, such as break-even inflation rates, remain elevated, indicating ongoing concerns. Additionally, the prolonged conflict involving Iran—initially expected to last a few weeks but now extending into its 26th week—has sustained upward pressure on oil prices and inflation risks.

RBC commodity strategist Christopher Louney maintains a bullish outlook for gold. He forecasts the metal trading predominantly between US$4,500 and US$5,000 this year, with a potential rise to US$5,000 by the end of 2026 and US$5,300 by the close of 2027. Louney highlights gold’s role as a store of value and a real asset resistant to debasement, factors well-suited to the current macroeconomic landscape marked by growing budget deficits, monetary and fiscal policy challenges, and concerns about “de-dollarisation.” He also notes a recent return of significant investor inflows, with annual inflows expected to exceed 200 tonnes. Central banks, after a pause earlier in 2023, have resumed buying gold, with over 700 tonnes of official sector purchases anticipated this year and next.

Louney points to an intriguing correlation ahead of the U.S. midterm elections this November: gold prices have shown a strong inverse relationship with former President Donald Trump’s approval rating. The recent dip in Trump’s approval corresponded with gold’s price increase in August.

Investor interest remains robust despite high prices dampening jewelry demand, especially in China, where gold imports by value rose 11 percent in the first half of the year. Similar views are expressed by a Bloomberg cross-asset strategist, who attributes recent price fluctuations more to month-end portfolio adjustments than a fundamental shift in the gold market.

The market’s reaction to Federal Reserve Chair Kevin Warsh’s recent comments on potential interest rate hikes also influenced short-term price movements. Gold prices briefly fell by over 4 percent following Warsh’s Jackson Hole speech, which increased the market’s expectation of a September rate increase to around 60 percent. Nonetheless, retail investors continued to add to gold-backed exchange-traded funds in August, even after a significant price correction earlier in the year.

Attention now turns to the upcoming U.S. non-farm payroll report for August. Historically, the Federal Reserve has refrained from raising rates after consecutive weak employment readings. The report’s outcome may therefore be pivotal, given the tension between persistent inflation and a softening labor market.

In Australia, gold mining stocks have gained momentum, with the sector’s weighting in the ASX 200 rising to 6.1 percent by late August. Analysts expect improved cash generation from top Australian gold companies through 2029, arguing that current consensus forecasts may underestimate gold’s long-term price strength. Morgan Stanley strategists project a near-term gold price target around US$4,450, with potential to surpass US$5,000 by 2027.

Central bank gold purchases have been a significant driver of demand this year, with notable buying from China and Poland. Analysts at Morgan Stanley attribute gold’s resilience to the market’s focus on fiscal deficits, government debt, and currency devaluation risks amid higher real yields. They suggest that stronger cash flows from gold producers should help investors withstand short-term price volatility as the market navigates an uneven global economic environment.