The trajectory of Federal Reserve policy has re-emerged as the central variable in gold pricing.
In its latest precious metals research report, JPMorgan Chase notes that as physical and retail demand cools simultaneously, capital flows into interest-rate-sensitive gold ETFs have regained dominance over marginal pricing, with the negative correlation between gold prices and US real yields significantly re-established.
Following the clearly hawkish signals from the first FOMC meeting chaired by the new Fed Chair Wash, gold has corrected by over 20% cumulatively since late February and remains range-bound at lower levels. Consequently, JPMorgan Chase has lowered its Q3 and Q4 gold price forecasts to $4,300/oz and $4,500/oz, respectively, representing reductions of approximately 20% to 25% from prior expectations. However, the firm maintains its long-term bullish outlook, anticipating that gold will re-enter an upward cycle in 2027 alongside a structural recovery in central bank and physical demand.
Focus on Short-Term Risks
Regarding near-term movements, the report emphasizes that risks remain notably skewed to the downside. If summer economic data persistently runs hot, reinforcing market expectations for earlier rate hikes, gold will face further valuation compression. In such a scenario, a decisive break below $4,000 per ounce could technically open the door for a decline towards the $3,500–$3,600 range.
ETF Flows Regain Pricing Control
JPMorgan Chase points out that since March, a stable negative correlation has re-established between gold prices and the US 10-year real yield. This shift is not coincidental but the result of multiple demand forces weakening simultaneously.
On the physical demand side, India's gold appetite has been notably suppressed due to external account pressures from energy costs and tighter import policies. While central banks resumed net purchases in April and May, the pace has turned cautious, offering limited marginal support.
Concurrently, retail capital allocation has clearly shifted focus away from the "currency debasement hedge" narrative towards assets like AI and memory chips, significantly reducing capital attention on the precious metals sector. Against this backdrop, ETFs have become the most critical marginal variable in the current gold market.
Data shows that since late February, global gold ETF holdings have seen a cumulative net outflow of approximately 128 tonnes (about -3%), which broadly aligns with the historical relationship with the roughly 50 basis point rise in the US 10-year real yield.
More notably, the price sensitivity to interest rates in this cycle is even higher than the historical average. JPMorgan Chase calculates that since late February, for every 1 basis point increase in the US 10-year real yield, the gold price has fallen by about $20 per ounce (approximately 0.4%–0.5%). This decline exceeds what can be explained by ETF outflows alone, reflecting the combined effects since March of deleveraging, periodic central bank selling, and the ebbing of retail demand.
Fed Path Drives Medium-Term Pricing
JPMorgan Chase believes that until other demand sources re-engage actively, gold's path will be highly dependent on Federal Reserve policy signals.
The current OIS forward curve is already pricing in nearly one full rate hike for this year and implies a cumulative path of about 40 basis points of hikes by April 2027. This market pricing is significantly more hawkish than the firm's base case scenario, which expects the Fed to remain on hold in 2026, with the first hike window pushed to the third quarter of 2027.
Even if the Fed ultimately does not hike, the upward-sloping structure of the OIS curve could remain quite sticky due to the resilience of the US labor market and new Chair Wash's stronger emphasis on inflation constraints. Furthermore, the firm's interest rate strategy team notes that the current US 10-year Treasury yield is still about 20 basis points below its model-implied fair value, suggesting a risk of upward revision in medium-term rates.
Against this backdrop, JPMorgan Chase has sharply revised its 2026 gold ETF flow forecast from a net inflow of about 400 tonnes to a net outflow of approximately 50 tonnes (year-to-date through June still shows a net inflow of about 19 tonnes). The central bank net purchase forecast has been modestly lowered from 640 tonnes to 600 tonnes, and the expected year-on-year growth rate for global bar and coin demand has been reduced from 10% to 3.6%.
Potential Downside Scenario
JPMorgan Chase clearly states that risks around the base case remain significantly skewed to the downside.
In an extreme scenario, if US summer employment and inflation data continue to run hot, the market might re-anchor expectations using the 1999–2000 style hiking cycle as a reference. In that cycle, the Fed raised rates by a cumulative 50–100 basis points, driving an additional increase of about 50 basis points in medium-to-long-term Treasury yields.
If the market significantly reprices towards such a path, the gold price could decisively break below $4,000 per ounce, triggering trend-following stops and technical selling, potentially pushing prices further down to test the $3,500–$3,600 range.
Beyond interest rate factors, a stronger US dollar poses additional pressure. JPMorgan Chase's FX strategy team believes the "US exceptionalism" narrative is strengthening. If AI-driven productivity divergence further widens the gap between the US and other economies, the dollar could sustain a strong cycle into the second half of 2026, thereby applying continued downward pressure on dollar-denominated gold.
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