Gold hasn't been protecting investors from rising inflation. Why China and ETF investors are buying anyway.

Gold is supposed to be place to hide when times get tough.

Every investor knows the drill: When markets buckle, buy gold.

But in September, that playbook has not worked out. The yellow metal has gotten hammered this month as oil prices have spiked and inflation fears have roared back, while technology stocks and even bitcoin - the very bets investors are supposed to flee in a panic - have ripped higher and helped underpin the broader stock market.

The most active gold contract, for December delivery (GC00) (GCZ26), has fallen 6.4% this month to trade at $4,200 an ounce on Wednesday morning - putting it on track to book its worst month since June, according to Dow Jones Market Data. That's in sharp contrast to the stock market, where the Nasdaq Composite COMP had risen 2.5% and the S&P 500 SPX was up 0.3% in September.

Even bitcoin (BTCUSD), the world's No.1 cryptocurrency and a notoriously volatile asset, had broken above $86,000 and surged 7% in September toward its highest level for the year.

To be sure, gold is a classic inflation hedge - a scarce physical asset whose dollar price tends to climb as currencies lose purchasing power due to rising price pressures. That makes it a natural refuge when oil prices (CL00) (CL.1) (BRN00) are rising, inflation is proving sticky and geopolitical tensions are running high.

But now, the yellow metal is caught in a tug-of-war. Rising oil prices, persistent inflation and seemingly endless U.S.-Iran tensions would seem to support bullion, but climbing Treasury yields and a stronger U.S. dollar are pulling it the other way. That's because gold pays no interest, so as yields rise, the opportunity cost of holding the metal increases. When investors can earn nearly 5% for holding a Treasury note for just two years BX:TMUBMUSD02Y, for example, holding a real asset that pays no yield becomes less attractive.

"Rising interest rates reduce gold's relative appeal by increasing the attractiveness of cash and short-term money-market income investments, which are once again able to offer investors positive real returns after inflation," said Kristian Kerr, head of macro and investment strategy at LPL Financial. Many investors were also swept up in the speculative frenzy that drove gold to fresh record highs last year and at the start of 2026, he noted.

A stronger dollar adds another headwind. Since gold is priced in U.S. dollars, a rising buck would make the metal less attractive to foreign investors. The ICE U.S. Dollar Index DXY, a gauge of greenback's strength against six major rivals, has climbed 1.7% in September, according to FactSet data.

Yet not everyone is selling gold. For governments and central banks around the world, the dip could be seen as a buying opportunity. The People's Bank of China (PBC), China's central bank, added over 20 metric tons, or 650,000 ounces, of gold to its reserves in August, its biggest monthly purchase since 2023. That also stretches PBC's gold buying streak to 22 months, according to data from the State Administration of Foreign Exchange of China.

"China, like many central banks, is taking a broad view of its reserve strategy and the benefits diversification can bring," said Joe Cavatoni, senior market strategist and head of public policy for the Americas at the World Gold Council.

In other words, the logic behind governments' gold purchases is less about inflation or yields than reserve security. For decades, governments and central banks around the world have held gold as a sovereign financial safeguard against economic instability, inflation and geopolitical risks, in the hope of reducing their reliance on the U.S. dollar and limiting their exposure to sanctions or assets that can be frozen by another government.

The World Gold Council's 2026 Central Bank Gold Reserves Survey found that 89% of reserve managers expect global central-bank gold holdings to rise over the next 12 months. The survey showed that central banks expect a smaller role for the U.S. dollar in their reserves over the next five years, Cavatoni noted. "Gold's role as a monetary asset keeps it firmly in reserve managers' thinking," he said.

But it's not just central banks that are buying. Aakash Doshi, global head of gold markets at State Street Investment Management, said investors were still putting a lot of money into exchange-traded funds tracking gold.

ETF investors continued to add holdings to U.S.-listed gold-related ETFs in September, which attracted $3.8 billion net inflows for the month, following $7.9 billion in August, according to data compiled by State Street.

Strong ETF inflows give Doshi's team confidence in the long-term bullish gold narrative despite the Federal Reserve's move to raise interest rates and a September swoon in bullion trading, he told MarketWatch on Wednesday. "We believe those are structural allocations, with gold being bought as a monetary, alt-fiat and diversification hedge," he said.

In Doshi's his view, as shorter-term Treasury yields have risen faster than longer-term rates BX:TMUBMUSD30Y in recent weeks, the gap between them has narrowed - a shift known as a "bear flattening." That could put more pressure on economic growth, as American consumers and businesses could feel the squeeze through more expensive loans and credit.

As a result, even if rising rates themselves are normally a headwind for gold, "this can buttress gold as a safe haven and lower-correlation asset," Doshi said. Lower-correlation assets refer to those that don't trade in the same direction as each other.

As for the appropriate share of an investing portfolio that the average investor should allocate to gold, Chris Gaffney, president of World Markets at EverBank Gold, said investors could benefit from holding up to 10% in the precious metal. "The recent slight pullback in gold is seen by many as a reason to add to their positions," he said.

-Isabel Wang -Myra P. Saefong