Gold prices have remained around $4,000 an ounce as persistent inflation drives markets to price in rate hikes, but Jefferies analysts say gold could still move higher next year even as real yields rise. The gold market has struggled since the U.S. and Israel started a war with Iran that shut down the Strait of Hormuz, disrupting roughly 30% of the world's oil supply and fueling new inflation fears. Markets are now pricing in the potential for two rate hikes in 2026, with the first increase expected in September, after three Federal Reserve committee members voted to raise interest rates following the July monetary policy meeting. Jefferies analysts noted that 10-year TIPS real yields have risen to around 2.41% from 1.94% at the start of the year, increasing the opportunity cost of holding gold and causing prices to sell off approximately 25% from peak levels. However, the firm remains relatively optimistic on gold prices later this year, drawing parallels to historical periods when gold recovered after real-rate pressure subsided.
Geopolitical Conflict and Energy Crisis Drive Inflation Pressures
The U.S. and Israel started a war with Iran, which shut down the Strait of Hormuz, disrupting the supply of roughly 30% of the world's oil. The ongoing conflict and ensuing global energy crisis have kept oil prices elevated, fueling new inflation fears. As a result, markets are pricing in the potential for two rate hikes this year, with the first increase expected in September. The Federal Reserve has reinforced these market expectations after three committee members voted to raise interest rates following the July monetary policy meeting.
Real Yields Rise to 2.41% as Markets Price in Rate Hikes
Analysts at Jefferies noted that real yields have moved significantly higher in this environment. They pointed out that 10-year TIPS real yields are around 2.41%, compared to 1.94% at the start of the year. At the same time, the Cleveland Federal Reserve's 10-year real rate is around 2.08%, with break-even inflation at roughly 2.27%, compared with approximately 1.67% and 2.25%, respectively, at the start of the year. "Higher real rates increase the opportunity cost of holding gold, and when the move is abrupt, gold sells off significantly. In this case, the abrupt change in rate expectations from the beginning of 2026 (1-2 rate cuts) to now (1-2 rate hikes) has led to gold selling off ~25% from peak levels," the analysts said.
Jefferies Compares Current Environment to 2013, 2018, and 2022 Rate Cycles
Although gold continues to struggle, the analysts compared the current market environment with the last time real rates rose dramatically, in 2013, when the Federal Reserve was preparing to raise interest rates for the first time since the Global Financial Crisis. "The 3-month drawdown was significant: gold/gold equities fell -22.9%/-35.3% in the 2013 taper tantrum, -5.0%/-17.0% around the 2018 real-rate peak, and -6.7%/-28.6% during the 2022 tightening cycle," the analysts said. "However, performance in the next 12 months looked very different. Gold miners barely recovered after 2013, surged after 2018, and recovered modestly after 2022. The key factor was not simply whether real rates had moved higher, but whether real-rate pressure subsided thereafter."
Central Bank Buying and Geopolitical Factors Support Gold Despite Headwinds
Despite the downside risks, Jefferies remains relatively optimistic on gold prices later this year. The firm noted that both gold and gold equities have already undergone a meaningful reset, suggesting much of the recent repricing has already occurred. The analysts added that, going forward, the direction of real-rate expectations matters more than their absolute level. At the same time, the analysts noted that despite these headwinds, gold is more than the sum of real interest rates. "Central bank buying, geopolitical uncertainty, fiscal concerns, de-dollarization, and hard-asset allocation are important supportive factors. Rate markets are currently biased toward tighter policy, with implied rates rising into 2027 and hike probabilities elevated. But this could change quickly if the U.S.-Iran war resolves. The historical data suggests that when real-rate pressure subsides, gold and gold equities move higher," the analysts said.
In a note published last week, Christopher Wood, Global Head of Equity Strategy at Jefferies, warned that if the current AI capex boom implodes, the Federal Reserve will not be able to raise interest rates. "For such reasons, now is the time for investors to start accumulating gold and gold mining stocks again after an extended pause to refresh," he said. "The U.S. dollar debasement trade is only in abeyance."
FAQ
Why did gold prices sell off approximately 25% from peak levels?
Gold prices sold off approximately 25% from peak levels due to an abrupt change in rate expectations from the beginning of 2026 (1-2 rate cuts) to now (1-2 rate hikes), which increased the opportunity cost of holding gold as 10-year TIPS real yields rose to around 2.41% from 1.94% at the start of the year.
What historical periods did Jefferies compare to the current gold market environment?
Jefferies compared the current environment to the 2013 taper tantrum (when gold/gold equities fell -22.9%/-35.3% in 3 months), the 2018 real-rate peak (-5.0%/-17.0%), and the 2022 tightening cycle (-6.7%/-28.6%), noting that gold's 12-month performance after these periods varied based on whether real-rate pressure subsided.
What factors does Jefferies say support gold despite higher real yields?
Jefferies analysts said central bank buying, geopolitical uncertainty, fiscal concerns, de-dollarization, and hard-asset allocation are important supportive factors for gold, and that the direction of real-rate expectations matters more than their absolute level going forward.
