The current market is indeed facing multiple headwinds: a strong U.S. dollar and a hawkish repricing of the Federal Reserve are forming a combined negative force, with a lack of catalysts in the short term sufficient to change the narrative. Until clear signals emerge, such as unexpectedly weak inflation data or a substantial weakening of the labor market, every price rebound may be viewed by the market as a window for adding short positions.
However, the market is systematically underestimating U.S. fiscal risks for the second half of the year. Tariff revenues continue to decline, pressure from Treasury supply is accumulating, and risk-free interest rates remain elevated—a repricing of term premiums is only a matter of time. Against this backdrop, the long-term bullish logic for gold remains clear.
Following the temporary ceasefire between the U.S. and Iran, the necessity for some central banks to use gold reserves for foreign exchange market intervention or energy imports has diminished. Pressure for large-scale sales from the Turkish central bank has significantly eased, and the structural trend of global central bank gold purchases remains unchanged.
With market logic switching to a U.S. economic overheating phase, the gold-to-silver ratio is expected to continue fluctuating within the 60-70 range. Meanwhile, the copper-to-gold ratio, already at historically low levels, has the potential to recover upwards, suggesting copper will outperform gold.
The market is never short of noise, but true trends often take shape quietly amidst the clamor. Short-term headwinds will eventually pass, while the anchor of long-term logic—provided it is solid enough—will ultimately emerge over time.
Recent Market Performance Review
Policy risk premium appears fully priced, with the market focus shifting to interest rate logic. Market expectations have undergone a dramatic shift, moving from anticipating rate cuts to pricing in hikes.
Since mid-May, gold prices have gradually decoupled from their negative correlation with oil prices. Brent crude oil prices retreated from highs near $100 per barrel to below $80, yet gold prices did not rebound correspondingly.
The analysis finds that since the Middle East crisis in February, the most relevant macro framework for gold remains the risk of intensifying inflation, a potential hawkish pivot in monetary policy, and the consequent rise in short-term interest rates. Since May, non-farm payrolls significantly exceeding expectations, a May CPI reading returning to the "4-handle," and a policy shift under leadership have made the market particularly focused on the trajectory of monetary policy.
COMEX positioning has plummeted, and global ETF funds are flowing out. Since 2026, geopolitical/political risk uncertainty has rapidly subsided, leading to a swift exit of previously overcrowded speculative capital. The gold positioning on COMEX has fallen to its lowest level in a decade; global gold ETF holdings have dropped by 107 tonnes from their peak in January this year.
What is Driving Inflation Concerns?
The June FOMC meeting highlighted inflation as the primary policy challenge this year. The Summary of Economic Projections (SEP) showed rising expectations for rate hikes, with the median dot plot indicating an expectation for 0.5 hikes, and nine officials projecting a hike this year (six of whom expect 50 basis points or more).
This shift primarily stems from a reassessment of inflation persistence, with the 2026 core PCE inflation forecast revised up to 3.3% and the 2027 forecast to 2.5%.
The Fed's statement reiterated its commitment to "price stability," and the press conference did not downplay the hawkish dot plot.
Services inflation shows stickiness, and inflationary pressures cannot be "looked through." Since late May 2026, international oil prices have fallen sharply, yet the expectation for Fed rate hikes has increased instead of decreased. Money market pricing shows the probability of a December hike climbed from about 50% in mid-May to 167% by June 22nd, with the 2-year U.S. Treasurys yield rising from about 4% to 4.21%.
The core answer to this "divergence" lies in: May core services inflation rose 0.29% month-over-month, and "supercore" inflation (excluding housing) increased 0.27% month-over-month, indicating core services inflation remains firm, with rents and supercore inflation staying elevated. Combined with potential upside risks such as renewed tariff increases, supply chain pressures, and technology price pass-through, the Fed is likely to remain cautious.
The role of falling oil prices here will not be to reduce the FOMC's tightening bias, but rather to delay the urgency of its rate hike decision.
Strong Dollar Has Framework Support
Fed hawkishness underpins a bullish dollar view. As of late June 2026, the U.S. Dollar Index has risen to its highest level since May of last year. The core logic supporting further dollar strength in the second half of the year comes from two aspects: the Fed's hawkish pivot and U.S. economic "exceptionalism."
From a monetary policy perspective, historical experience shows that from about six months before the Fed's first rate hike until one month after the hike is implemented, the dollar index typically appreciates steadily by about 5%. The Fed historically does not undertake shallow rate hike cycles—once started, the cumulative increase is at least 75 basis points. According to research from JPMorgan Chase, a 3% dollar appreciation is a reasonable baseline scenario corresponding to a 75-basis-point hike cycle. From a cross-asset perspective, this would be a short-term negative for gold.
Strong underlying U.S. economic momentum drives dollar strength. Beyond monetary policy divergence, three additional factors support the strong dollar: economic growth momentum, asset performance differentials, and terms of trade advantages.
First, growth divergence. U.S. economic momentum is significantly stronger than Europe's—the U.S. maintains expansion while the Eurozone continues to weaken, providing solid support for the dollar.
Second, asset performance differentials. Tech stocks have led U.S. equities to strong gains, and the outperformance of U.S. stocks relative to other global markets is driving sustained capital inflows into dollar-denominated assets.
Third, terms of trade advantages. The U.S., as an energy-independent net exporter, continues to see improving terms of trade, while Europe, as a net importer of oil and gas with high external energy dependence, has seen its terms of trade severely damaged. This structural difference further reinforces the dollar's relative strength.
Fiscal Risks Await in the Second Half of 2026
The 10-year term premium has risen only modestly, not pricing in brewing fiscal risks. Since April 2025, when themes like "tariff shocks" and political risks triggered a "sell America" trade, causing a significant rise in the 10-year U.S. Treasury term premium, the term premium indicator has fluctuated within a narrow range of 60-80 basis points over the past year, failing to reprice potential fiscal risks.
Entering the 8th month of the 2026 fiscal year, the U.S. federal deficit reached $1.25 trillion, lower than the $1.36 trillion in the same period last year but still the third-highest in nearly 20 years. Marginal relief in fiscal pressure primarily stems from two factors: first, the Treasury has filled financing gaps by increasing issuance of short-term Treasury bills (T-bills), coupled with the Fed's Reserve Management Purchases (RMP) program absorbing new supply, effectively easing long-end supply pressure; second, increased tariff revenue has provided additional income support for federal finances.
One source of fiscal risk is uncertainty in tariff revenues. Since November 2025, the U.S. has invoked the IEEPA and Section 232 of the Trade Expansion Act of 1962 to implement tariff exemptions and partial reductions for goods on the PTAAP list, directly lowering the effective tariff rate. Monthly U.S. tariff revenue has fallen from a peak of $34.2 billion in October 2025 to $23.5 billion in May 2026.
On February 20, 2026, the U.S. Supreme Court ruled that tariff measures issued under the IEEPA were unlawful. This event is expected to result in approximately $175 billion in one-time tax refunds, creating a short-term shock to federal finances. Additionally, compared to the CBO baseline forecast, U.S. government revenue is projected to be cumulatively $1.7 trillion lower over the next decade.
To fill the fiscal gap, the U.S. turned to Section 122 as an alternative tariff tool, but this move was also ruled unlawful by the U.S. Court of International Trade (CIT) on May 7, 2026. Currently, the U.S. intends to invoke Section 301 to introduce a new additional tariff scheme: imposing a 10% additional tariff on imports from Canada, Mexico, the EU, Indonesia, Ecuador, and Pakistan, and a 12.5% additional tariff on imports from other target economies including China, the UK, and India.
According to calculations by the Committee for a Responsible Federal Budget, if the additional tariff policy under Section 301 is permanently implemented, it would add approximately $970 billion in revenue to the U.S. federal government by fiscal year 2036. However, the Section 301 tariff plan also faces potential legal challenges.
Another source of fiscal risk is rising interest costs. From fiscal year 1985 to 2025, net interest payments on U.S. federal debt surged from $129.1 billion to $970 billion, growing more than 6.5 times over 40 years with a compound annual growth rate of 5%. In just the first eight months of fiscal year 2026, net interest expense reached $722.7 billion, an increase of 8.7% year-over-year. This is one of the most rigid and difficult-to-reduce core expenditure items in the U.S. budget.
The acceleration in net interest expense is essentially the result of the combined effect of a continuously expanding debt base and rising Treasury yields. Historical patterns show a high correlation between the 10-year Treasury yield and net government interest expense. The rise in the risk-free rate is imposing a sustained and rigid, immense pressure on U.S. finances.
A sensitivity analysis was conducted on the fiscal burden from rising rates. Assuming that over the next 10 years, Treasury yields rise by 50 basis points overall from the 4.1% level at the end of 2025 to around 4.6%, the marginal impact on fiscal conditions is estimated as follows.
The calculation results show that if the base rate rises by 50 bps to around 4.6%, the cumulative additional interest expense on U.S. federal public debt over the next decade would be approximately $1.6 trillion. This process exhibits a "low at first, high later" characteristic; under the gradual transmission of duration effects, the impact is mild in the first three years and severe in the subsequent seven years. This indicates that the damage from higher rates to fiscal conditions is lagged and long-term; the "bill" for high rates will come due over the next 5-10 years.
The third fiscal risk is the potential early increase in coupon Treasury issuance. Based on the current coupon Treasury auction sizes announced in the quarterly refunding statement as of May 2026, an estimate was made for the net financing gaps in fiscal years 2027 and 2028. The assumptions are: first, raising the deficit for the next two fiscal years to $2.2 trillion, mainly considering tariff policy changes and a surge in defense spending triggered by the Middle East crisis; second, maintaining the fiscal year 2026 coupon Treasury auction sizes unchanged, with no increase in issuance; third, gradually raising the proportion of T-bills to tradable Treasurys to the maximum limit of 25% as recommended by the TBAC over the next two fiscal years.
The core conclusion: Under the assumption of unchanged current auction sizes, there is a net financing gap of approximately $350 billion in fiscal year 2027, and this gap climbs to about $1 trillion in fiscal year 2028. This gap cannot be filled solely by increasing T-bill issuance because the T-bill proportion is already near the TBAC-recommended upper limit, leaving limited room for net increase, and rollover risk continues to amplify as T-bill size expands. Therefore, it is almost inevitable that the Treasury will begin to expand auction sizes for coupon bonds (especially 2- to 7-year maturities) starting from early 2027 (or possibly even earlier, in the fourth quarter of 2026).
How to Regain an Upward Path? The Underestimated Fiscal Risk
The fiscal outlook is a core reason for being bullish on gold, but under the dual supports of bolstered tariff revenues and the Treasury Secretary's delay in increasing coupon Treasury issuance, the term premium has not yet begun to reprice potential fiscal risks.
However, three reasons suggest the fiscal outlook will deteriorate in the second half of 2026: first, tariff revenue faces significant downside risk—the Supreme Court ruling that IEEPA is unconstitutional, the expiration of Section 122 tariffs on July 24 with an uncertain renewal prospect, meaning tariff revenue could contract sharply or even result in refund payments; second, Treasury supply pressure continues to accumulate—the financing gap for fiscal year 2028 is estimated to be as high as about $1 trillion, forcing the Treasury to increase coupon bond issuance starting in 2027; third, with risk-free rates remaining elevated, the cost of net interest payments continues to climb. The CBO projects annual interest expense will exceed $1 trillion in the future, further worsening the fiscal situation. The combination of these three pressures means a repricing of the term premium is only a matter of time.
Will the Summer Labor Market Soften?
Strong employment seems unlikely to be sustained through the summer. Although the labor market has shifted rapidly from zero growth at the start of the year to demand-driven employment expansion, with the three-month moving average of non-farm payrolls reaching a solid 188K in May—which could also be explained by the AI investment boom.
However, over the past three years, initial jobless claims have shown a seasonal increase during the summer, ultimately triggering subsequent rate cuts. If this pattern repeats this year, the market could quickly shift from "hike trading" to "recession trading"—though this is not the base case scenario.
Furthermore, wage growth continues to decelerate, with the year-over-year rate further slowing to 3.5%. The easing of wage pressure will not add extra pressure to the core inflation concerns of the hawks.
Middle East Crisis Eases, Reducing the Need to Sell Gold for Currency/FX or Energy Purchases
Gold is the Turkish central bank's "last line of defense." The Turkish central bank selling reserve assets to defend the lira is not new. Due to structural domestic factors—high inflation, loose monetary policy, current account deficits—the Turkish central bank has long prioritized using dollar reserves for FX intervention rather than gold, which is viewed as "national wealth" and the "ultimate reserve." For example, according to U.S. Treasury data, Turkey's holdings of U.S. Treasurys fell to $7.1 billion in April 2025, down from $16 billion the previous month (March). By the end of March 2026, this figure had fallen to a historic low of $1.78 billion. The substantial depletion of dollar reserves means traditional intervention space is limited. With gold reserves accounting for over 60% of total reserves, gold becomes the "last line of defense" when conventional intervention tools are exhausted or insufficient.
Combining the above factors, a critical convergence point formed in March 2026: 1) The Iran conflict caused oil prices to spike → import costs jumped instantly; 2) The lira depreciation slope steepened → exceeding conventional intervention capacity; 3) Dollar reserves were already significantly depleted → traditional intervention space limited; 4) Depreciation expectations self-reinforced → accelerating capital outflows; 5) Gold prices were at historical highs → the "opportunity cost" of selling gold was low (selling at a high). At this critical juncture, selling gold became a "have-to" choice—not because it was the optimal choice, but because other options were either exhausted or insufficient to cope with the scale of the shock.
With the Middle East crisis easing, the necessity to sell gold to stabilize the currency or purchase oil and gas has diminished.
Gold-to-Silver and Copper-to-Gold Ratios
The gold-to-silver ratio is highly likely to continue fluctuating within the 60-70 range. Looking at monthly data from 2000 to the present, the historical average for the gold-to-silver ratio is 67.3, with most of the time spent fluctuating between 40 and 80. The current level of 66.4 is right near the historical average, having retreated significantly from the high around 100 seen in early 2025.
In May and June 2026, market trading logic switched to "economic overheating"—the upper part of the K-shaped recovery reinforced by AI, the lower part driven by employment rebound, with strengthening growth expectations fueling rate hike expectations. Since mid-May, the gold-to-silver ratio has generally oscillated between 60 and 70. The view is that the logic behind this range will support the ratio maintaining a fluctuating pattern during the "overheating phase."
The copper-to-gold ratio is expected to continue its recovery. The copper-to-gold ratio has been trending lower over the past four to five years, currently at 3.24, approaching its lowest level in nearly 40 years. Since 1986, the long-term average of this ratio has been around 5.7, and it only first fell below 3.0 last year. As a long-term sentiment indicator measuring economic growth expectations and market risk appetite, the historically low copper-to-gold ratio contains an important mean reversion signal—if the U.S. economy maintains its resilience as discussed earlier, there is intrinsic momentum for the copper-to-gold ratio to recover upwards, at which point copper's performance is expected to outperform gold's.
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