Global Market Strategist
In Brief
- Gold has pulled back sharply from its peak as higher real yields, a stronger U.S. dollar, ETF outflows, and reduced investor risk appetite outweighed its usual safe haven appeal.
- Central bank, retail, and physical demand have cooled from the unusually strong levels that previously helped gold decouple from interest rates.
- The long-term case remains constructive, but prices may stay volatile and range-bound until real yields fall, the dollar weakens, or the Fed turns more dovish.
After a powerful rally that saw the price of gold rally 155% from the start of 2024 to a peak above USD 5,100/oz in February 2026, we have since seen the market pull back sharply in recent months. Gold is now down by more than 20% from its peak to just above USD 4,000/oz.
We remain of the view that the rationale for holding gold in a portfolio is intact, but the drivers of gold pricing and investor appetite have changed and understanding them is important for assessing both the near-term and long-term outlook for the asset.
Once viewed as an inflation hedge and a reliable store of value when real yields were negative, the price of gold has been influenced by geopolitical risk, concerns about the debasement of the U.S. dollar, and shifting demand from central banks. More recently, however, it has become much more sensitive again to interest rates.
Why the fall?
The recent decline in gold was unusual because it happened during a period of geopolitical stress, as the U.S. moved into conflict with Iran. Gold would normally be expected to perform well in that environment, given its safe haven role, but the nature of the shock was energy-led, making energy assets the more immediate inflation hedge. At the same time, profit-taking, broad de-risking, and an unwinding of the U.S. debasement trade, where investors had bought gold on concerns about U.S. dollar weakness, fiscal deficits, and debt sustainability, all weighed on prices as investors’ views shifted toward what were seen as more immediate concerns.
As those flows faded, gold started to behave less like a pure safe haven. ETF flows became the marginal price setter, and when real yields turned higher, gold turned lower as the retail buyer is more sensitive to interest rates. That matters because gold does not pay interest: when inflation-adjusted bond returns rise, the opportunity cost of holding gold increases. A stronger U.S. dollar added further pressure by making gold more expensive for non-dollar buyers, particularly in key Asian physical markets.
Investor positioning also amplified the move. Earlier in the year, gold had become a crowded trade, so when momentum reversed, funds and traders cut exposure quickly. ETF outflows, reduced futures positioning, and technical selling after breaks below key levels all accelerated the decline.
Central bank demand
Central banks have been one of the most important supports for gold in recent years. The demand from central banks coupled with non-traditional buyers in the form of retail investors is labelled as the reason why we saw a de-coupling of the traditional relationship between gold prices and interest rates post-pandemic, as these flows overwhelmed the usual interest-rate-sensitive activity. The latest central bank actions might help explain some of these recent price movements, as 1Q 2026 saw a lull in central bank buying activity, coming in at net purchases of only 57 tonnes, a far cry from 2024 – 2025’s 240 tonne average, before rebounding in 2Q to 289 tonnes. When central bank buying is strong and broad-based, it can dampen gold’s sensitivity to rates, but when buying slows or becomes concentrated among fewer buyers, gold can become more volatile and more exposed to investor flows.
The long-term drivers behind central bank gold buying remain supportive. Reserve diversification, concerns about U.S. dollar dependence, geopolitical risk, and the desire to hold assets outside the traditional financial system all remain important. Gold supply also grows only slowly, so even if central banks simply maintain their current gold allocations as overall reserves rise, they may still need to keep buying over time. Against limited supply growth, that steady demand remains an important structural support for prices.
Why gold is now more tied to the Fed
For much of the recent bull market, gold was supported by unusually strong buying from central banks, retail investors, and physical markets. That helped gold rise even when real yields were high. Recently, however, those sources of demand have cooled and the negatively correlated relationship has returned, as can be seen in Exhibit 1. As a result, gold has become more sensitive again to U.S. Federal Reserve (Fed) policy, real yields, and the U.S. dollar.
If the market continues to expect higher interest rates, gold may remain capped. If inflation stays sticky and the Fed sounds hawkish, as it does currently, investors may continue to reduce exposure. However, if the Fed shifts toward a more dovish stance, or if real yields and the dollar weaken, gold could regain momentum.
Still range-bound near term, constructive longer term
In the near term, we believe gold will remain volatile and range-bound. A move back up toward USD 5,000/oz is possible if several things line up in gold’s favor, namely that geopolitical tensions ease enough to reduce energy-driven inflation pressure, the U.S. dollar weakens, real yields fall, and the Fed moves away from a hawkish stance. That combination would likely revive ETF inflows, retail interest, and broader demand.
Investment implications
Gold’s short-term trade has become more challenging, but its long-term role as a portfolio diversifier remains intact. Central bank diversification should provide structural support for prices, while concerns around de-dollarization, currency debasement, and demand for hard assets remain reasons for investors to hold gold strategically, though it is not the only diversification option. The market likely needs a fresh catalyst in the form of lower real yields, a softer dollar, a dovish Fed shift, or stronger physical and central bank buying to restart the next leg higher. Until then, investors should expect volatility rather than a straight-line rally.