Gold fell 14.1% in Q2, the worst quarterly performance in 12 years, according to Invesco's quarterly gold outlook. The decline was driven by spiking energy prices that raised inflation expectations and introduced the possibility of Federal Reserve rate hikes. On 24 June, gold dipped below $4,000 an ounce for the first time since November 2025, ending the quarter at $4,008 after erasing all Q1 gains and dropping over $1,500 from the all-time intraday high set in late-January this year. Despite the sharp pullback—the worst since Q2 2013's 22.7% decline—Invesco analysts maintain a constructive outlook for the second half of 2026, citing structural support from central bank demand, with 45% of central bankers surveyed by the World Gold Council expecting to increase gold reserves in the next 12 months.
Gold Price Falls 14.1% in Q2
Sam Whitehead, Benjamin Jones, and David Scales of Invesco wrote that the gold price fell by 14.1% in Q2, more than erasing its gains from Q1 and leaving it over $1,500 an ounce off the all-time intraday high set in late-January this year. Volatility picked up in April, but most of the decline occurred over the following two months. On 24 June, the yellow metal dipped just below $4,000 an ounce for the first time since November 2025. Gold spent the following days bouncing around that level and ended the quarter at $4,008. The authors noted this constituted the worst quarter for gold since Q2 2013, when the price fell by 22.7%, but pointed out that gold is still up by 21.3% over the past 12 months.
Inflation and Fed Policy Shift Market Expectations
The Invesco analysts identified several headwinds that drove the gold price lower during the quarter. Inflation emerged as a threat that could potentially linger beyond what was previously being priced in, which means interest rates could stay higher for longer. The US Dollar strengthened, partly in response to the revised interest rate outlook. The conflict's impact on energy prices resulted in a market focused on inflation, with WTI Crude ending the quarter at $70/barrel. PCE inflation hit 4.1% in May, the highest level since April 2023, driven mainly by elevated energy prices. Core PCE, which excludes food and energy, also reached 3.4%, the highest reading since October 2023. The FOMC, under new Fed Chair Kevin Warsh, had sounded a warning to the market in the minutes following the committee's April meeting, saying it would "deliver price stability" after inflation has remained above the target 2% rate for five years running.
The authors noted that after a general expectation of further rate cuts, interest rates are now forecast to rise in 2026. Earlier this year, the futures market had been predicting Fed rate cuts in 2026. By the end of May the market was pricing in virtually no chance of a cut in 2026, and began entertaining the possibility of rate hikes. When the quarter ended, the market was placing a 33.7% probability of a 25 basis-point increase at the end of July and at least one rate hike (67% chance) by the time the FOMC concludes its September meeting. The CME FedWatch shows an 83% probability that interest rates will be higher than they are now by the end of the year.
Central Bank Demand Supports Long-Term Outlook
Despite the rise in inflation expectations and the potential for rate hikes, Invesco maintains a constructive outlook for gold in the second half of 2026. The authors stated that much of the structural support for gold remains largely intact, with central banks set to continue buying gold to diversify their reserves. The World Gold Council reported that a record 45% of central bankers responding to its latest survey said they expected to increase their gold reserves in the next 12 months, while 89% expect gold central bank reserves to increase globally over the coming year. This structural support was reflected in Invesco's recent Global Sovereign Asset Management Study, in which a majority of central banks reported increasing gold allocations over the past three years, with concern over global volatility, inflation protection, and geopolitical uncertainty now among the leading drivers of ongoing gold purchases.
FAQ
What caused gold to fall 14.1% in Q2?
Gold's 14.1% decline in Q2 was driven by spiking energy prices that raised inflation expectations and introduced the possibility of Federal Reserve rate hikes. PCE inflation hit 4.1% in May, the highest level since April 2023, and the FOMC under new Fed Chair Kevin Warsh signaled a more hawkish stance on interest rates in the minutes following the committee's April meeting. The US Dollar also strengthened during the quarter, making gold more expensive for international investors.
How are market expectations for Fed policy affecting gold prices?
By the end of May the market was pricing in virtually no chance of a rate cut in 2026 and began entertaining the possibility of rate hikes. When the quarter ended, the market was placing a 33.7% probability of a 25 basis-point increase at the end of July and at least one rate hike (67% chance) by the time the FOMC concludes its September meeting. The CME FedWatch shows an 83% probability that interest rates will be higher than they are now by the end of the year. Higher interest rates increase the opportunity cost of holding non-yielding gold.
Why does Invesco expect gold prices to rise through the second half of 2026?
Invesco maintains a constructive outlook for gold in the second half of 2026 due to structural support from central bank demand. The World Gold Council reported that a record 45% of central bankers responding to its latest survey said they expected to increase their gold reserves in the next 12 months, while 89% expect gold central bank reserves to increase globally over the coming year. Invesco's Global Sovereign Asset Management Study showed a majority of central banks reported increasing gold allocations over the past three years.
