Gold Keeps Rebounding As China’s Buying Spree Helps Fuel the Rally

Gold prices have rebounded over the past weeks, reversing a sharp wartime slump as cooling inflation expectations, a more dovish outlook for the Federal Reserve and a surge in Chinese buying breathe new life into the precious metal.

Gold rose to $4,465 an ounce on Wednesday, its highest level in more than two months, before declining slightly on Thursday. The rally marks a significant turnaround for an asset that had struggled following the outbreak of the war with Iran despite its traditional reputation as a haven during periods of geopolitical uncertainty.

The reversal is also sending a potentially encouraging signal about investors' expectations for inflation and interest rates. Gold does not pay interest, which means it often becomes less attractive when investors expect inflation-adjusted, or "real," yields on bonds to rise.

When the war with Iran began, markets anticipated that higher energy prices and supply disruptions could fuel inflation, potentially forcing central banks to maintain higher interest rates.

That combination weighed on gold. Instead of benefiting from geopolitical turmoil, the metal declined, challenging the conventional assumption that investors automatically rush into gold when global risks intensify.

Now, the economic calculus is changing. The turning point came after the Federal Reserve's meeting at the end of July, when policymakers delivered what investors interpreted as a more dovish message than expected. Expectations that the Fed could maintain a less aggressive approach toward interest rates helped push real yield expectations lower and made gold more attractive by comparison.

Wednesday's relatively mild Consumer Price Index report added momentum to that trade. U.S. inflation remained relatively contained in July, giving policymakers and consumers a second consecutive month of encouraging price data.

While the impact of renewed Middle East fighting and higher energy prices may not yet be fully reflected in the numbers, the report provided investors with additional evidence that underlying inflation pressures have not accelerated dramatically.

For gold, that matters. Lower inflation expectations and the prospect of a less hawkish Fed reduce some of the pressure that drove prices down earlier in the Iran conflict. But monetary policy may not be the only force behind gold's latest rally.

China has emerged as a major source of new demand. China reported purchasing nearly 20 metric tons of gold in July, its largest monthly acquisition since October 2023. Such a substantial purchase adds another source of support for a market already benefiting from shifting expectations around U.S. monetary policy.

China has been building its gold reserves as part of a broader effort to diversify its holdings, making its purchasing activity closely watched by traders. Large central bank purchases can have an outsized effect because they remove significant quantities of gold from the available market while also signaling long-term institutional demand.