Why has the price of gold been correcting?
Since March, the price of gold has been in a sustained adjustment phase, with the international price once falling below $4,000 per ounce, representing a pullback of over 25% from the March high of $5,321 per ounce. This is primarily due to two factors.
Firstly, the US-Iran conflict pushed up oil prices and inflation, raising market concerns about persistent US inflation and fostering expectations for monetary tightening.
Secondly, the June FOMC meeting, the first chaired by the new Fed Chair, was interpreted as hawkish, intensifying monetary tightening fears. The Chair emphasized inflation discipline, and the dot plot was revised upward for inflation expectations, with half of the 18 voting members supporting at least one rate hike within the year. The current market narrative suggests the Fed's policy focus is on "controlling inflation." Futures markets have already priced in one Fed rate hike each in 2026 and 2027 to restore dollar credibility, with a stronger US dollar putting downward pressure on gold.
Regarding these two lines of reasoning, we believe it's premature to extrapolate linearly. US inflation may have already peaked and could enter a downward trajectory in the second half of the year. The new Chair's first meeting also does not necessarily signal that the Fed has completely pivoted to tightening; the current stance may be to create room for a future policy shift back toward easing. Therefore, this round of gold correction does not signify the end of the bull market, and a turning point may not be far off.
First, the Fed has not fully turned hawkish, and dollar credibility may not be easily restored.
The market has interpreted the hawkish tilt of the dot plot and the Chair's emphasis on inflation discipline as signals of policy tightening, which we believe may be a misjudgment. The Chair did not submit their own dot plot forecast and repeatedly emphasized in the press conference that the dot plot is not accurate and may be frequently revised in the future. This indicates the dot plot's guidance for future policy direction has significantly diminished, and there is even a possibility it could be discontinued. Therefore, the dot plot's indication of a Fed rate hike restart this year does not represent the actual future policy path.
The Chair's emphasis on inflation discipline in their first meeting is likely standard practice for a new official to establish public trust and should not be over-interpreted. Previously, when the US Treasury Secretary took office, they also proposed a "3-3-3 target" involving deficit reduction, economic growth, and oil production increases, which the market initially took seriously, but none of the three targets were ultimately met. The current anti-inflation stance from the new Fed Chair may be fundamentally similar.
More noteworthy is the Chair's announcement of five task forces covering Federal Reserve communication, balance sheet policy, data usage, productivity and employment, and the inflation framework. We believe these may be establishing a new interpretive framework for future rate cuts.
The communication task force may reshape the Summary of Economic Projections (SEP), dot plot, and press conference mechanisms, reducing the risk of the Fed being constrained by its own forward guidance and hawkish dot plots. The market may shift from parsing Fed language and the dot plot back to focusing on growth, inflation, and employment data itself.
The data sources task force is even more critical. The Chair has previously emphasized that monetary policy has "long and variable" lags, with effects often taking 6 to 12 months to transmit to the real economy. Therefore, policy cannot wait for lagging data to fully confirm before turning, and there is a need to introduce more real-time, actionable indicators to guide decisions. The Chair favors the trimmed-mean PCE inflation measure, which excludes the most extreme high and low components of inflation and is naturally less sensitive to volatile supply shocks like oil prices and transportation. This measure currently shows lower inflationary pressure than traditional metrics like core PCE. If the Chair uses this indicator more in the future to explain the inflation situation, it could provide a data-based rationale for earlier and faster rate cuts that is acceptable to the market.
The inflation framework task force aims to examine inflation drivers, Fed responsibility, inflation measurement, and achieving price stability from first principles. Since the 1980s, the secondary pass-through effects of oil price shocks to US core CPI have significantly weakened. If the Fed re-differentiates between one-off price level shocks and persistent inflation, short-term disturbances like oil prices and tariffs would not constitute grounds for monetary tightening.
The productivity and employment task force may incorporate AI into the policy reaction function. The Chair has repeatedly expressed confidence in AI boosting productivity. Historically, technological revolutions have often been disinflationary forces. If AI increases potential growth and lowers unit labor costs, resilient US growth may not necessarily correspond to higher inflation. In the short term, AI could suppress hiring in highly exposed sectors and push up the unemployment rate, potentially increasing the necessity for rate cuts. Therefore, AI could both reduce inflation constraints and increase employment pressure, with both paths pointing toward greater scope for easing.
The establishment of the balance sheet task force also does not imply the Fed will aggressively shrink its balance sheet in the near term. Balance sheet reduction (quantitative tightening) drains money market liquidity and, without sufficient regulatory and fiscal coordination, could easily trigger financial risks. A more realistic path might involve first promoting financial deregulation to enhance the financial system's capacity to absorb US Treasuries. Simultaneously, the Treasury could issue more short-term debt to alleviate funding pressure, with discussions on balance sheet reduction coming later. This approach could reduce the risks of balance sheet reduction, help improve US Treasury liquidity and lower liquidity premiums, and also align with political desires for lower rates.
Overall, the new Fed Chair's first FOMC meeting may not represent the hawkish pivot the market currently perceives. The hawkish dot plot and reiterated anti-inflation commitment might be superficial, while de-emphasizing forward guidance and launching the five task forces may indicate the substantive policy direction. The Chair's true intent may not be to raise rates immediately, but rather to construct a new institutional narrative for future rate cuts in an environment of high inflation readings, an expanding hawkish faction, and pressure on dollar credibility.
It is also premature to conclude that dollar credibility is being restored. US debt continues to accumulate, domestic and foreign policies continue to strain US credibility, and the Chair's balance sheet tightening policies still face political, economic, and market constraints, with the pace and outcomes highly uncertain. Judging the reversal of the trend of weakening dollar credibility based solely on policy statements from one Fed meeting is insufficient.
Second, high US inflation lacks persistence; summer may be the peak, with a downward path in the second half.
This round of US inflation increase has been primarily driven by oil prices, not by demand re-accelerating, and a wage-price spiral has not formed. Beyond energy, housing rent, used cars, food, and other core goods all face downward pressure in the second half of the year. Recently, as US-Iran tensions have significantly eased, oil prices have retreated notably, approaching pre-conflict levels, suggesting the energy shock's upward push on CPI may fade quickly. The market's linear extrapolation of a one-time oil price shock into runaway inflation may overestimate inflation risks.
Beyond inflation, the US employment situation is not as robust as surface data suggests. The May non-farm payrolls added 172,000 jobs, exceeding market expectations, but recent months' data has been volatile, and initial readings should not be extrapolated linearly. Calendar effects, sample size reductions, and model statistical deficiencies all weaken the reliability of initial non-farm payrolls figures, with subsequent significant revisions not uncommon. Since 2021, May's initial non-farm payrolls figures have been consistently revised downward, with a median revision of about 89,000 jobs. If a similar revision occurs this time, May's job additions could drop to around 83,000, aligning with the view of a cooling labor market.
Overall, we believe US inflation is highly likely to decline significantly in the second half of the year. Entering 2027, barring unexpected policy or geopolitical shocks, a return of US inflation to around 2% is not a low-probability event. Falling inflation and weakening growth would diminish tightening expectations and open space for the Fed to shift policy back toward easing.
The gold bull market is not over, and a turning point may be near.
In a previous outlook report, we systematically reviewed the patterns of peaks in the five gold bull markets since 1970, finding that historically, gold bull markets have ended with Fed policy tightening or a full economic recovery.
As analyzed above, US inflation is likely to peak this summer, the labor market is cooling, and the new Fed Chair's reforms are creating space for a future policy shift toward easing; Fed policy is not turning comprehensively tight. As geopolitical and inflationary pressures gradually ease in the second half of the year, the probability of Fed rate hikes is low. Instead, the timing and pace of rate cuts could exceed market expectations, driving a return of US dollar liquidity easing and providing fresh support for assets like gold and stocks. Therefore, we believe the gold bull market is not over. June, with global inflation peaking and several central banks hiking rates, may represent the period of greatest global liquidity pressure, making an accelerated gold adjustment unsurprising. Entering July-August, as US inflation and growth data decline or the new Fed Chair provides new policy guidance, there is potential for the Fed tightening narrative to be quickly reversed. We judge that a turning point for the gold market is drawing closer. Simultaneously, we note that gold also serves as a potential hedge against an AI bubble, offering risk diversification benefits. In summary, we remain optimistic about gold's prospects, recommending maintaining positions, buying on dips, and awaiting a turnaround.
Risks include US inflation data exceeding expectations and unforeseen geopolitical developments.
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