A Strong Dollar and Rising Bond Yields Increase the Cost of Holding Gold

Gold is suffering from dual pressures that reduce its appeal to investors; first, the strengthening of the US Dollar Index, which makes dollar-priced gold more expensive for buyers outside the dollar zone, and second, the rise in US Treasury yields across various maturities in response to the Federal Reserve's tightening policy.

US 10-year Treasury yields have reached high levels not seen in years, according to reports, compounding the opportunity cost of holding non-interest-bearing gold. Analysts warn that this equation will remain pressing unless yields fall or the dollar weakens.

On a practical level, rising yields are prompting institutional investors to rebalance their portfolios in favor of government bonds, which now offer positive real yields for the first time in years. This has been reflected in a noticeable drop in buying inflows into gold exchange-traded funds (ETFs) in recent weeks.

On the other hand, some technical analysts believe that the dual impact of the dollar and yields may already be partially priced in, noting that any decline in interest rate hike expectations or weakness in US employment data could help ease this pressure and restore some appeal to the yellow metal.

What do these terms mean?

Dollar Index (DXY): An index that measures the strength of the US dollar against a basket of six major currencies, such as the euro, yen, and pound sterling. Real Yields: The difference between the bond yield and the inflation rate; when real yields rise, gold's attractiveness declines because bonds generate actual income that exceeds inflation.