Gold's Resilience Amid Dollar Strength: Is the Rally Sustainable?

The U.S. dollar has regained some of its lost ground in 2025, yet gold continues to defy expectations, trading near record highs above $3,650 per ounce. This paradox—gold's resilience amid dollar strength—has sparked debates among investors about the sustainability of the rally. To answer this, we must dissect the interplay of macroeconomic positioning, central bank behavior, and shifting investor sentiment in a post-CPI environment.

Post-CPI Dynamics: A Delicate Balance

The August 2025 CPI report, released on August 13, showed headline inflation at 2.9% year-over-year, with core CPI at 3.1%. While these figures exceeded the Fed's 2% target, they fell short of the “stickier inflation” narrative that once justified aggressive rate hikes. The data, coupled with softer PPI readings and weak labor market revisions, has shifted market expectations toward a more dovish Fed.

The CME FedWatch tool now prices in a 92% probability of a 25-basis-point rate cut at the September meeting, with a 50-basis-point cut gaining traction. This pivot has fueled speculation that the Fed could cut rates three times in 2025, creating a tailwind for gold. Historically, gold thrives in low-rate environments, as the opportunity cost of holding non-yielding assets diminishes. However, the dollar's recent strength—driven by geopolitical safe-haven demand and Trump-era tariff-driven inflation—has complicated this dynamic.

Central Bank Gold Buying: A Structural Shift

The most underappreciated driver of gold's rally is the relentless accumulation by central banks. From 2023 to 2025, global central banks have purchased over 1,000 metric tons of gold annually, a pace unseen since the 1950s. China, India, and Russia lead the charge, with China alone adding 150 tons in the first half of 2023.

This surge reflects a strategic rethinking of reserve management. Gold now accounts for 27% of global central bank reserves, surpassing U.S. Treasuries for the first time in nearly three decades. The shift is driven by de-dollarization efforts, geopolitical risks (e.g., sanctions on Russia), and a loss of trust in Western institutions. For instance, JPMorgan notes that major investors are shifting capital toward gold futures and away from short-term Treasuries, signaling a broader loss of confidence in the dollar's hegemony.

Investor Sentiment: Bulls in the Driver's Seat

The latest CFTC Commitments of Traders (COT) report for gold, as of September 2, 2025, reveals a bullish positioning. Non-commercial traders (speculators) hold 64.1% of open interest in long positions, while commercial hedgers maintain a net short. This imbalance suggests that speculative demand—rather than hedging—dominates the market.

The 14-day RSI for gold hovers near 78, indicating overbought territory, yet buying pressure persists. This resilience is partly due to the “flight to safety” narrative. Geopolitical tensions in Eastern Europe and the Middle East, coupled with Trump's attacks on Fed independence, have amplified gold's safe-haven appeal. Meanwhile, the U.S. dollar's strength is increasingly seen as a temporary reprieve rather than a structural reversal.

The Gold-Dollar Tug-of-War: What's Next?

The current equilibrium between gold and the dollar hinges on three factors:
1. Central Bank Demand: As long as central banks continue to buy gold at a record pace, the price floor for gold remains intact.
2. Fed Policy: A more aggressive rate-cutting cycle would weaken the dollar and push gold higher, while a hawkish pivot could temporarily strengthen the dollar.
3. Geopolitical Risks: Escalations in conflicts or further erosion of trust in U.S. institutions could reignite gold's safe-haven bid.

However, profit-taking and technical resistance at $3,675–$3,700 could trigger short-term volatility. A surprise CPI miss (e.g., core CPI below 3.0%) might accelerate the Fed's easing path, pushing gold toward $3,800. Conversely, a hotter-than-expected report could test support at $3,500.

Actionable Insights for Investors

1. Diversify with Gold ETFs: For those wary of physical gold's liquidity constraints, ETFs like SPDR Gold Shares (GLD) offer exposure to gold's rally while mitigating storage costs.
2. Hedge Against Dollar Weakness: Investors holding dollar-denominated assets should consider allocating 5–10% to gold or gold-linked equities (e.g., Newmont Corporation, NEM) to offset potential devaluation.
3. Monitor Central Bank Purchases: Track the World Gold Council's quarterly reports for clues on institutional demand. A slowdown in central bank buying could signal a topping pattern.
4. Balance Short-Term and Long-Term Bets: Use pullbacks (e.g., a dip below $3,500) to add to positions, while maintaining a portion of holdings in cash or short-dated Treasuries to capitalize on potential dollar rebounds.

Conclusion

Gold's resilience in 2025 is not a fleeting anomaly but a reflection of deep-seated shifts in global monetary policy and investor behavior. While the dollar's strength may ebb and flow, the structural drivers—central bank diversification, inflation hedging, and geopolitical uncertainty—suggest that gold's rally is far from over. For investors, the key lies in balancing tactical positioning with a long-term perspective, ensuring that portfolios remain resilient in an era of monetary and geopolitical uncertainty.