A correction in the gold price in Q2 erased the gains from earlier in the year to record gold’s worst quarterly performance since Q2 2013.
Rising inflation caused a shift in the US interest rate outlook, with the market now pricing the Fed to hike rates this year.
Structural support remains in place, including central banks buying gold, but the market could remain volatile in the near term.
The gold price fell by 14.1% in Q2, more than erasing its gains from Q1 and leaving it over $1,500 an ounce off the all-time intraday high set in late-January this year. Volatility picked up in April, but most of the decline in the gold price occurred over the following two months. On 24 June, the yellow metal dipped just below $4,000 an ounce for the first time since November 2025. Gold spent the following days bouncing around that psychologically relevant level and ended the quarter at $4,008.
This was the worst quarterly performance for gold since Q2 2013, when the price fell by 22.7%. However, it should be noted that pull-backs such as this are not uncommon when any market has risen so strongly for a sustained period, and this latest price correction might prove healthy given gold is still up by 21.3% over the past 12 months.
That said, downside risks to the gold price remain. The next few months could be pivotal for gold, as we watch to see how the Fed reacts to inflation – and whether inflation is sticky or comes down with lower oil prices – and if the US Dollar firms further versus other major currencies. Higher interest rates and a stronger USD are generally negative for gold, as the former increases the opportunity cost of holding a non-yielding asset and the latter makes gold more expensive for international (non-US) investors.
Multiple headwinds contributed to the fall in the gold price. Inflation emerged as a threat that could potentially linger beyond what was previously being priced in, which means interest rates could stay higher for longer. The US Dollar strengthened, though only a little, partly in reply to the revised interest rate outlook and, lastly, some of the geopolitical risk premia was removed from the perceived “haven” asset as the market seemed convinced that negotiations between the US and Iran were progressing towards a satisfactory outcome.
That conflict triggered volatility in energy prices and focused the market’s attention on inflation. Oil prices rose above $100/barrel in early April, with WTI Crude hitting a high of $113, and remained volatile throughout the quarter. Prices would rise or fall according to events and the market’s view of how negotiations were progressing to bring an end to the conflict and reopen the Strait of Hormuz.
The longer the conflict continues, the more lasting the impact on inflation not just on oil prices but knock-on effects more broadly. WTI Crude ended the quarter at $70/barrel, an indication the market expects supply to resume. The broader market also seems to believe inflation will be brought under control, as illustrated by inflation expectations (Figure 2). The question is whether the market is being overly optimistic, given recent actual inflation readings and with the US-Iran situation still potentially volatile.
The annual Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, rose in May to 4.1%, the highest level since April 2023. This was driven mainly by energy prices. The core PCE inflation rate, which excludes food and energy, rose to 3.4% annualised, the highest reading since October 2023. The FOMC, under new Fed Chair Kevin Warsh, had sounded a warning to the market in the minutes following the committee’s April meeting, saying it would “deliver price stability” after inflation has remained above the target 2% rate for five years running.
The gold price correction, which began in March, could be seen as a normal response to the rise in inflation expectations, the Fed’s more hawkish view on interest rates and the recent strength in the US Dollar. The USD eased at the beginning of the quarter but spent most of the period gaining against its major trading partners. A stronger USD makes gold more expensive for international (non-US) investors and consumers, which tends to reduce demand from those important segments.
Earlier this year, the futures market had been predicting Fed rate cuts in 2026, with the only question being how many. The CME FedWatch tool was showing practically no chance of a rate hike this year. The inflation pressures mentioned above then shifted the market’s expectations, with the Fed under new Chair Warsh seemingly more committed to addressing the persistence of above-target inflation, with hikes firmly on the table.
By the end of May, market pricing implied no chance of a cut and began weighing up the possibility of higher rates. When the quarter ended, the market was placing a 33.7% probability of a 25 basis-point increase at the end of July and at least one rate hike (67% chance) by the time the FOMC concludes its September meeting.
The CME FedWatch shows an 83% probability that interest rates will be higher than they are now by the end of the year. Higher interest rates are negative for gold, as it increases the opportunity cost of holding the non-yielding gold asset.
Despite this correction, we believe much of the structural support for gold remains largely intact. Central banks look set to continue buying gold to diversify their reserves. The World Gold Council (WGC) reported that a record 45% of central bankers responding to its latest survey said they expected to increase their gold reserves in the next 12 months, while 89% expect gold central bank reserves to increase globally over the coming year.
This structural support is reflected in our 2026 Invesco Global Sovereign Asset Management Study, in which a majority of central banks reported increasing gold allocations over the past three years, with concern over global volatility, inflation protection, and geopolitical uncertainty now among the leading drivers of ongoing gold purchases.
While demand from central banks is largely insensitive to price change, investment demand tends to be more sensitive to price momentum. Rising prices may attract flows into an asset, but falling prices can sometimes encourage selling, particularly when an investor can lock in a profit and needs to access liquidity to reallocate elsewhere. Retail purchases of coins and small gold bars were a strong source of demand throughout the long-term gold rally, and it will be important to see how they respond to the correction.
For retail and professional investors, the case for including gold in a portfolio is not based on a single consideration, such as using it only to hedge geopolitical risk, although historically gold has performed this role relatively well. Rather, gold can be a useful diversifier as it tends to have low correlation to most assets, especially equities. Gold is a unique asset as it has no issuer, no credit risk, and a long history as a store of value when confidence in currencies, institutions, or market plumbing is questioned.
Gold does not pay an income, so higher interest rates can make cash and bonds more attractive by comparison. Lower rates reduce that opportunity cost, which can support demand for gold.
Gold is priced globally in US dollars, so a stronger dollar usually makes it more expensive for non-US buyers and can weigh on demand. Conversely, a weaker dollar can make gold more affordable internationally and help support prices.
Gold is often viewed as a hedge against inflation because its supply is limited and it is not tied to any single currency. However, inflation’s impact depends heavily on real interest rates: if rates rise faster than inflation, gold can face pressure.
Gold is considered a store of value because it is scarce, durable, widely accepted and cannot be printed like fiat currency. These qualities have helped it preserve purchasing power over long periods, especially during economic or currency stress.
The World Gold Council is the gold industry’s market development organisation, representing major gold mining companies and promoting understanding of gold’s role in markets and society. It publishes research, data and guidance on gold demand, investment, central banks and responsible supply chains.
A physical gold exchange-traded commodity (ETC) is a security designed to track the gold price, typically backed by allocated physical bullion held with a custodian. It gives investors exposure to gold without needing to store or insure bars or coins themselves.
Gold can act as a diversifier because its drivers often differ from equities and bonds, particularly during periods of market stress, inflation concern or geopolitical uncertainty. It can also provide liquidity and a potential hedge, though it does not generate income and can be volatile.
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