The youngster, who is thought to have been about 12 or 13, was seen with a group of similar age, pulling the large kitchen knife out of his trousers on Durham Street.
The incident happened at around 4.30pm and the police were contacted by a witness.
The woman, who did not want to be named, said: “I was shocked, really shocked in fact.
“I think it was because they looked so young.
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“I’m disgusted in what I witnessed.
“We were all teenagers at some point, but we would not have dared do something like this.
“If they are prepared to carry knives like this now, what are they going to be like in five years time? It’s frightening.
“He could have easily fallen over and seriously hurt himself if he had a knife in his trousers.”
The youngsters had been on the land between the back of the houses on Cannon Street and the businesses on Durham Street, close to the rear of China City restaurant.
She said there were five youngsters in total, three boys and two girls.
The boy, who was wearing black tracksuit bottoms, pulled the knife out and waved it at one of the girls.
Dressed in a green Parker jacket, she then took it off him and ran off.
Despite the incident not appearing to be threatening, the police have been made aware of the incident and anyone with details should contact Castleford NPT on 101.