Summary of Key Points
In the first half of the year, gold prices experienced a significant drop: from a historical high of $5,598 per ounce in January to nearly breaking below $4,000 by the end of June, representing a near 30% decline. The sharp fall was caused by a combination of negative factors (a reversal in expectations for Federal Reserve interest rate hikes, withdrawal of short-term funds, and reduced demand for safe-haven assets), although there is still support from central banks around the world purchasing gold in the long term. The direction of gold prices in the second half of the year will depend on three key variables: whether Federal Reserve policies become too restrictive, whether geopolitical conflicts recur, and whether the pace of central bank gold purchases remains stable. There are clear differences in opinions among institutions regarding the future market trends.
I. The "Reversal Logic" Behind the Gold Price Crash: From a sought-after asset to a liability
At the beginning of the year, gold prices soared due to two main factors:
1. Expectations of interest rate cuts: Investors bet that the Federal Reserve would cut rates in 2026, making gold, as an interest-free asset, more valuable in a low-interest-rate environment.
2. Demand for safe-haven assets: The outbreak of tensions between the United States and Iran led to increased demand for gold as a means of hedging against potential chaos.
However, these two factors were shattered after March:
- Inflation exceeded expectations: In April, the U.S. CPI rose by 3.8%, and PPI soared by 6%, indicating ongoing price increases, which made it unlikely for the Federal Reserve to cut rates easily.
- The Federal Reserve shifted to a hawkish stance: In May, officials signaled the possibility of rate hikes, and in June, the new chairman confirmed a hawkish approach, completely shattering market expectations of rate cuts. Instead, investors began to bet on rate hikes.
- Decline in safe-haven demand: Although tensions between the U.S. and Iran eased temporarily and oil prices dropped, gold prices continued to fall, indicating that the primary issue had shifted from safety concerns to high interest rates. As long as interest rate expectations remain high, it will be difficult for gold prices to recover.
II. A Divided Capital Market: Short-term Flight vs. Long-term Investment
The gold market is currently divided into two camps of investors:
- Short-term funds: These are in a state of panic and are withdrawing from the market:
- Global gold ETFs saw net outflows of $2 billion in May, with their overall size shrinking by 2%.
- In China, the scale of seven gold ETF products decreased by 36.2 billion yuan in the past three months; the Huaan Gold ETF alone lost 17 billion yuan in one month.
- Banks are also reducing their support for gold investments: Bank of Communications and Huaxia Bank lowered the returns on structured gold deposits, while China Construction Bank and Industrial and Commercial Bank of China plan to close personal precious metal trading services in July. This indicates that short-term funds are fearful of high interest rates and are seeking to minimize their exposure.
- Long-term funds: These are determined to buy gold at lower prices:
- Central banks around the world continued to purchase gold, with net purchases amounting to 244 tons in the first quarter of 2026 (a 3% increase year-on-year). The People's Bank of China has been increasing its gold holdings for 19 consecutive months.
- A large majority of central banks (89%) plan to increase their gold reserves over the next 12 months, setting a new record. These funds see gold as an opportunity due to ongoing trends such as "de-dollarization."
III. Divided Opinions Among Institutions: Bearish vs. Bullish Perspectives
There is a stark contrast in opinions among institutions regarding the future of gold prices:
- Bearish camp: They have lowered their target prices for gold:
- Goldman Sachs has reduced its target price for the end of 2026 from $5,400 to $4,900 (and even to $4,400 if rates are hiked).
- JPMorgan Chase and Citibank have also lowered their forecasts for this year's average gold price, with Citibank setting a three-month target of $4,000.
Their reasoning is that the Federal Reserve is unlikely to cut rates and may even raise them, reducing the attractiveness of gold as an investment.
- Bullish camp: Despite lower forecasts, they still hold hope:
- BMO Bank has lowered its forecast for this year's average price but maintains a target of over $5,000 for the first quarter of 2027.
- China International Capital Corporation believes that the gold bull market is not over and that inflation may ease in the second half of the year, potentially leading to rate cuts and supporting gold prices. They also point out that the trend of "de-dollarization" continues, providing long-term support for central bank gold purchases.
IV. The Three Key Variables Determining Gold Prices
To predict whether gold prices will rise or fall in the second half of the year, focus on these three factors:
1. Whether Federal Reserve policies become too restrictive: If inflation declines and the Federal Reserve does not raise rates or even cuts them, gold prices could rebound.
2. Whether geopolitical conflicts recur: If tensions between the U.S. and Iran intensify again, demand for safe-haven assets may increase, driving up gold prices.
3. The stability of central bank purchasing patterns: If central banks continue to buy gold at current rates, the long-term support for gold prices will remain, preventing further declines.
In summary, while short-term gold prices may continue to fluctuate, the long-term trend is likely to be upward as long as trends such as "de-dollarization" and central bank purchases persist. For individual investors considering gold investments, it is more prudent to focus on the longer-term trends rather than chasing short-term price movements.