I think the respect there comes from what he represents (tradition, collective judgement of the Nobel Committee, respect gained by the Nobel prize as a result of it being awarded to certain people, etc.) not from the actual person of Carl Gustaf. While we can question each of those, e.g. achievements of some of the laureates may appear to many rather questionable today (I won't name names but I have a few in mind and many people do too), I think we can not deny that Nobel prize is still regarded as an esteemed award. So that what people are bowing to, not the external appearance of some old man named Carl.
This. Carl XVI Gustaf, as a person, is of questionable importance and virtue. But as king of Sweden he's a living symbol. He's like the flag or something. Achieving this effect is also why European royalty has been widely apoliticized.