JPMorgan warns: If the Federal Reserve raises interest rates early, gold prices may fall below 4000 again or even test 3500-3600.

The Federal Reserve’s policy path has once again become the core variable for gold pricing. JPMorgan’s latest precious metals research report points out that as both physical and retail demand cools off simultaneously, gold ETF flows—highly sensitive to interest rates—have again taken the lead in marginal pricing. The negative correlation between gold prices and U.S. real yields has been significantly rebuilt. After the first FOMC meeting chaired by new Fed Chairman Walsh sent a clear hawkish signal, gold has cumulatively corrected more than 20% since late February, and is still fluctuating in a low range. Therefore, JPMorgan has lowered its gold price forecast for the third and fourth quarters to $4,300/oz and $4,500/oz respectively, or about 20%–25% down from previous forecasts. However, the bank maintains a long-term bullish stance, believing that in 2027, as central bank and physical demand structurally recover, gold will re-enter an upward cycle. For the short-term outlook, the report stresses that risks remain clearly skewed to the downside. If summer economic data continue to run hot, strengthening market pricing for an earlier rate hike, gold will face further valuation compression. In this scenario, a decisive breach below $4,000/oz could open up technical downside space to the $3,500–$3,600/oz range. ETF flows resume dominance in pricing; negative correlation between gold price and real yields is re-strengthened JPMorgan points out that since March, gold prices and U.S. 10-year real yields have reestablished a stable negative correlation. This change is not accidental, but a result of multiple demand drivers weakening simultaneously. On the physical demand side, India’s external accounts are under pressure due to rising energy prices and tighter import policies, resulting in significantly suppressed gold demand. Although central banks resumed net gold purchases in April and May, the pace has turned cautious with limited marginal support. Meanwhile, retail investment has clearly shifted focus, moving away from the “currency depreciation hedging” narrative toward assets like AI and storage chips. Attention to the precious metals sector has notably declined. Against this backdrop, ETFs are currently the most crucial marginal variable in the gold market. Data show that since late February, global gold ETF holdings have seen a net outflow of about 128 tons (around -3%), matching the historical correlation with the U.S. 10-year real yield rising about 50 basis points. Of particular note, gold’s sensitivity to interest rates in this cycle is even higher than the historical average. JPMorgan estimates that since late February, for every 1 basis point rise in the U.S. 10-year real yield, gold prices have dropped about $20/oz (around 0.4%–0.5%), a decline exceeding what ETF net selling alone can explain, reflecting the combined effects of post-March deleveraging, central bank phased selling, and waning retail demand. The Fed’s path dominates medium-term pricing; the market has already priced in hike risks ahead of time JPMorgan believes that before other demand picks up again, gold’s trajectory will depend highly on Fed policy signals. Currently, the OIS forward curve is almost fully pricing in one rate hike within the year, and implies a cumulative hike path of about 40 basis points by April 2027. This market pricing is noticeably more hawkish than JPMorgan’s base-case scenario—where they expect the Fed to hold steady in 2026, with the first hike delayed to Q3 2027. Even if the Fed ultimately does not hike, the steepness of the OIS curve may remain sticky, due to the strong resilience of the U.S. labor market and Chairman Walsh’s increased emphasis on inflation constraints. JPMorgan’s rate strategy team also points out that the current U.S. 10-year Treasury yield is still about 20 basis points below its model-implied fair value, implying medium-term rates could move higher. Against this backdrop, JPMorgan has sharply lowered its 2026 gold ETF flow forecast from a net inflow of about 400 tons to a net outflow of about 50 tons (with year-to-date inflows of around 19 tons as of June); central bank net gold buying forecast has been trimmed from 640 tons to 600 tons; global demand growth for gold bars and coins is also revised down from 10% YoY to 3.6%. Downside risk concentrated scenario: breaking below $4,000 may trigger technical selling JPMorgan clearly points out that the risk structure surrounding its base-case remains skewed to the downside. In an extreme scenario, if U.S. summer employment and inflation data continue to run hot, the market may once again anchor to a 1999–2000-style rate hike cycle for reference, during which the Fed cumulatively raised rates by about 50–100 basis points and caused an additional 50 basis point rise in long-term Treasury yields. If the market reprices significantly towards this path, gold could decisively break below $4,000/oz, triggering trend stop-losses and technical selling and falling further to the $3,500–$3,600/oz range. Aside from interest rate factors, a stronger dollar adds further pressure. JPMorgan’s FX strategy team believes the “U.S. exceptionalism” narrative is intensifying. If AI-driven productivity differentials widen the gap between the U.S. and other economies, the dollar may continue its strong cycle into the second half of 2026, exerting sustained pressure on dollar-denominated gold. Risk Disclosure and Disclaimer The market carries risk; investment requires caution. 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