On Wednesday (October 7) in early Asian trading, spot gold was trading around $4,170 per ounce. Gold prices rose 0.57% on Tuesday, supported by a pause in the rise in US Treasury yields and a weaker dollar. By the close of New York trading on Tuesday, spot gold had risen 0.57% to $4,163.78 per ounce, while US gold futures for December delivery rose 0.7% to settle at $4,187.10 per ounce. The yield on the 10-year US Treasury note retreated slightly after rising to a more than 20-year high on Monday, and the dollar fell from a one-year high, making dollar-denominated gold cheaper for investors holding other currencies.

Safe-haven demand returns: Turmoil in French debt and concerns about US debt drive gold prices higher.

Gold's rise on Tuesday was primarily driven by a return of safe-haven demand. Jim Wyckoff, market analyst at American Gold Exchange, stated, "We've seen some safe-haven demand for gold due to turmoil in the French bond market and growing concerns about the US Treasury market." The increasing government debt and widening budget deficits in parts of the Eurozone, particularly France, continue to unsettle investors and push up sovereign bond yields. This safe-haven logic reverses the downward pressure from last week—previously, the French fiscal shock pushed up US Treasury yields, supported the dollar, and suppressed gold; now, concerns stemming from the French bond market turmoil are transforming into safe-haven demand for gold, while the pause in the rise in US Treasury yields provides double support for gold prices.

Dollar and yields retreat: Gold prices get a breather

The decline in the dollar and yields was the direct driver of the gold price rebound. The yield on the 10-year U.S. Treasury note rose to a more than 20-year high on Monday before retreating slightly, with the 10-year yield falling 4.2 basis points to 5.269%, the 30-year yield falling 2.2 basis points to 5.642%, and the two-year yield falling 4.4 basis points to 4.789%. The dollar's pullback from a one-year high made dollar-denominated gold cheaper for overseas buyers. Will Compernolle, macro strategist at FHN Financial, said traders are taking a breather, awaiting the next major catalyst, possibly the PPI or CPI. Yields are already high, and traders need to see a more convincing reason to push Treasury prices down further before they can rise further. This means that if yields stall at high levels, the downward pressure on gold will weaken, opening up room for a rebound.

Treasury bond auctions were robust: demand did not weaken significantly, but concerns remained.

Tuesday's solid three-year Treasury auction boosted the upward momentum of U.S. Treasuries. The auction saw good demand, with the winning yield at 4.932%, lower than the secondary market yield at the bid close. Direct bidders were allocated 31.7%, the highest since February. However, the bid-to-cover ratio was slightly weak at 2.62, below the average of 2.65 for the previous six auctions. This combination suggests that short-term demand is acceptable, but investor caution remains. Olivier d Assier, senior director of investment decision research at SimCorp, said that despite the recent sell-off in the bond market, it is too early to turn bullish on U.S. Treasuries. He pointed out that a crisis is underway, but no one has offered a credible solution, and most governments are no longer even pretending to strive for budget balance. This assessment implies that concerns about fiscal sustainability will persist, providing medium- to long-term safe-haven support for gold.

Interest rate hike expectations: 22% probability in October, 84% probability in December.

Market pricing in a Fed rate hike is clearly divergent. Following weaker-than-expected US job growth in September, the market has reduced its bets on a Fed rate hike this month. According to the CME FedWatch Tool, traders currently see only a 22% chance of a rate hike this month, but still expect an 84% probability of a December hike. This divergence has complex implications for gold: the decreased probability of an October rate hike provides some support for gold prices, but the still high probability of a December rate hike suggests that the broader policy outlook remains skewed towards tightening. The minutes of the Fed's September FOMC meeting will be released on Thursday Beijing time, and these minutes could help determine the future direction of monetary policy. If the minutes are dovish, it may confirm the market's dovish repricing, providing support for gold; if they are hawkish, it may reignite expectations of a rate hike, suppressing gold prices.

Institutional View: TD Securities predicts gold prices will break $5,000 in 2027.

Despite short-term headwinds, the long-term outlook remains positive for gold. TD Securities analysts stated in a report that continued buying by exchange-traded funds (ETFs) and demand from self-determining investors continue to support gold, maintaining their previous view that gold prices will break through $5,000 per ounce in 2027. This forecast is based on the long-term logic of continued ETF buying and demand from self-determining investors, contrasting with the current short-term pressure. Furthermore, resilient Middle Eastern oil exports, coupled with the G7's emergency release of reserves, have eased supply concerns and pushed oil prices down, which to some extent alleviated inflation concerns, indirectly and complexly impacting gold.

Summarize

The current surge in gold prices is primarily driven by a return to safe-haven demand and a decline in the US dollar and US Treasury yields. Volatility in the French bond market and concerns about US Treasuries have fueled safe-haven flows into gold, while the decline in 10-year US Treasury yields from 24-year highs and the weakening of the US dollar from one-year highs have provided double support for gold prices. Demand at the three-year Treasury auction was robust, but the bid-to-cover ratio was slightly weak, reflecting continued investor caution. The market is pricing in a 22% probability of a rate hike in October and an 84% probability in December, making the September FOMC meeting minutes a key catalyst for short-term direction. TD Securities maintains a bullish stance, predicting gold prices will break through $5,000 by 2027. With a weaker dollar and yields, and a return to safe-haven demand, gold has gained some breathing room in the short term, but the expectation of a December rate hike remains high, and the upside potential may be limited by the $4,200 level. The FOMC minutes and subsequent inflation data will be the core variables determining the short-term direction of gold. (Spot gold daily chart, source: EasyTrade) At 7:53 Beijing time, spot gold was trading at $4166.87 per ounce.