Gold's lustre dims as Treasury yields surge, markets bet on higher Fed rates

Spot gold fell as much as 4% to $4 111/oz on Monday, its lowest since August 5, as oil prices climbed amid a stalemate in US-Iran talks and the yield on the benchmark ten-year US Treasury note touched its highest since June 2007, before paring gains.

"Today's fresh multi-decade highs in US borrowing costs have finally seen the gold price give way," said Adrian Ash, head of research at online bullion marketplace BullionVault.

Two-year Treasury yields, the most sensitive to interest-rate expectations, have risen sharply this month as markets price in a roughly 70% chance of a second consecutive Fed rate hike in October, raising the opportunity cost of holding gold.

Higher interest rates tend to weigh on gold because investors can earn higher returns on interest-bearing assets, while financing costs for speculative positions also rise.

Data from the US Commodity Futures Trading Commission for the week ended September 22 showed money managers' net long positions in gold had fallen to their lowest level since late July, when bullion was trading around $4000/oz.

Gold-backed exchange-traded funds recorded modest outflows of 1.6 metric tons last week, according to the World Gold Council, though holdings remain substantial at 4 249 tons.

Adding to the bearish picture, demand in top consumer China has softened ahead of the October 1 to 7 holiday period, with local premiums over the global benchmark falling to zero by the end of last week.

Some support could come from continued central-bank buying and stronger Indian demand ahead of Diwali and the wedding season, said StoneX analyst Rhona O'Connell.

However, historically high prices are likely to limit jewellery demand among price-sensitive buyers, particularly farmers, amid a relatively weak Indian monsoon, she added.