Gold’s Paradox: Record Demand from China and Central Banks Can’t Counter the Yield Headwind

Central banks and Asian buyers drive record physical gold demand, but surging US bond yields and a strong dollar push prices down 17% from peak, with Fed rate hike odds rising.

The gold market is presenting an extraordinary puzzle. Physical buying has never been stronger — China’s bar-and-coin demand hit an all-time quarterly high, central banks are stockpiling at a record pace, and total global demand surged to 1,231 tonnes in the first quarter. Yet the metal’s price is under relentless pressure, sliding 17% from its 52-week peak of $5,450 an ounce to a recent close of $4,510. The culprit is the same force that has upended so many asset classes this year: surging US bond yields.

Yields on long-dated Treasuries have climbed to levels not seen in nearly two decades. The 30-year US government bond touched 5.181% — the highest since 2007 — while the 10-year note pushed above 4.6%. For a zero-yielding asset like gold, the opportunity cost becomes punishing. North American gold ETFs bled $13 billion in March alone, the largest monthly outflow ever recorded in that region, as institutional money fled to safer, income-bearing alternatives. The dollar’s strength added to the pain: the US Dollar Index hovered near 99.33, a multi-week high that makes gold more expensive for foreign buyers and weighed on futures, which dipped to $4,464.32 on May 19, the lowest since March 30.

Central banks, however, are not flinching. Goldman Sachs recently revised its model for capturing physical sovereign purchases, concluding that actual volumes have been significantly underestimated since late summer. The bank now calculates a rolling annual average of 50 tonnes per month and expects that to rise to 60 tonnes per month for the current year. JPMorgan, while slightly more conservative — it forecasts 640 tonnes of central-bank demand for 2026 — still sees a year-end target of $6,000 an ounce. The Polish National Bank emerged as the biggest single buyer in the first quarter, adding 31 tonnes to bring its reserves to 582 tonnes. Overall, notenbanken purchased an estimated 244 tonnes in Q1, spending $37 billion — the highest quarterly outlay on record.

This institutional demand is part of a broader Asian-led buying frenzy. China’s appetite for bars and coins jumped 67% year on year to 207 tonnes, smashing the previous quarterly record of 155 tonnes. Globally, physical demand (excluding ETFs) rose 42% to 474 tonnes, the second-highest quarterly total ever. The jewelry segment, by contrast, contracted sharply: demand slumped 23% to 300 tonnes in Q1, as consumers in China and India redirected spending from ornaments into investment-grade bullion. The total value of all gold purchases reached $193 billion in the first three months of 2026, up 74% from a year earlier.

Despite this wall of physical buying, the macro backdrop continues to dominate. US inflation in April came in at 3.8%, a tenth of a percentage point above forecasts, reigniting the debate over the Federal Reserve’s next move. The FedWatch Tool now puts the probability of another rate increase before year-end above 58%. Fed governor Paulson recently described the current interest rate level as “appropriate,” dousing hopes of an early easing cycle. Meanwhile, mixed signals from the US regarding relations with Iran have injected geopolitical volatility, and rising oil prices are stoking fresh inflation anxiety that could keep the Fed on hold.

Technically, the market is testing critical support. The spot price stabilized around $4,499.69 midweek, but the key zone lies between $4,466 and $4,423. A break below that would open the door to the long-term moving average near $4,330. On the upside, resistance stands at $4,657 and $4,891. The relative strength index sits near 50, offering no clear directional bias. UBS remains constructive, targeting $5,600 by year-end on the expectation that real rates will eventually fall. Goldman Sachs, sticking with its year-end forecast of $5,400, argues that central-bank buying will continue to provide a floor.

For now, gold is trapped between two powerful forces: an institutional and Asian demand surge that history suggests should support prices, and a yield-driven selloff that shows no sign of abating. The next Federal Reserve meeting will be the critical test — either the inflation data softens and yields retreat, or the central bank’s hawkish stance deepens the pullback. In either scenario, the $4,423-4,466 support zone will likely decide whether this is a correction within a bull market or the start of a more significant decline.