JPMorgan Warns: If the Fed raises interest rates early, gold prices may fall below 4000 again and even test 3500-3600.

The Federal Reserve's policy path has once again become the core variable for gold pricing. In its latest precious metals research report, JPMorgan points out that as physical and retail demand cool simultaneously, interest rate-sensitive gold ETF flows have reasserted dominance in marginal pricing, with the negative correlation between gold prices and U.S. real yields significantly reestablished.

Following the newly appointed Fed Chair Warsh's first FOMC meeting, which delivered a clear hawkish signal, gold has corrected over 20% cumulatively since the end of February and is still oscillating in a low range. JPMorgan has therefore lowered its gold price forecasts for Q3 and Q4 to $4,300/oz and $4,500/oz, respectively, a reduction of about 20% to 25% compared to previous estimates. However, the bank maintains a long-term bullish view, believing that in 2027, as central bank and physical demand structurally recover, gold will re-enter an upward cycle.

Regarding near-term trends, the report emphasizes that risks remain clearly tilted to the downside. If summer economic data continues to be strong, reinforcing market pricing for an earlier rate hike, gold will face further valuation compression; in this scenario, if it effectively breaks below $4,000/oz, technical factors could open downside room to the $3,500–$3,600/oz range.

ETF flows re-dominate pricing, negative correlation between gold and real yields strengthens again

JPMorgan points out that since March, gold prices and the U.S. 10-year real yield have reestablished a stable negative correlation. This change is not coincidental but the result of multiple demand forces weakening simultaneously.

On the physical demand side, India's external accounts are under pressure due to energy price pressures, and import policies have tightened, significantly suppressing gold demand. Although central banks resumed net purchases in April and May, the pace has been cautious, providing limited marginal support.

Meanwhile, retail capital allocation has clearly shifted focus from the "currency devaluation hedge" narrative to assets such as AI and memory chips, leading to a significant decline in capital attention to the precious metals sector. Against this backdrop, ETFs have become the most critical marginal variable in the gold market.

Data shows that since the end of February, global gold ETF holdings have seen cumulative net outflows of approximately 128 tons (about -3%), broadly consistent with the historical relationship with a roughly 50-basis-point rise in the U.S. 10-year real yield.

More notably, the sensitivity of gold prices to interest rates in this cycle is even higher than the historical average. JPMorgan estimates that since the end of February, for every 1-basis-point increase in the U.S. 10-year real yield, gold prices have fallen by about $20/oz (approximately 0.4%–0.5%), a decline exceeding what can be explained by ETF selling alone, reflecting the combined effects of deleveraging, periodic central bank selling, and the retreat of retail demand since March.

Fed path dominates mid-term pricing, market has already priced in rate hike risk

JPMorgan believes that before other demand revives, gold's trajectory will be highly dependent on Fed policy signals.

The current OIS forward curve is nearly fully pricing in one rate hike within the year and implies a cumulative rate hike of about 40 basis points by April 2027. This market pricing is significantly more hawkish than JPMorgan's baseline scenario—the bank expects the Fed to stay on hold in 2026, with the first rate hike window pushed back to Q3 2027.

Even if the Fed ultimately does not actually hike, the upward-sloping structure of the OIS curve may remain sticky, given the resilience of the U.S. labor market and the new Chair Warsh's greater emphasis on inflation constraints. Additionally, the bank's rate strategy team notes that U.S. 10-year Treasury yields are currently about 20 basis points below the model-implied fair value, suggesting upside risk for mid-term rates.

Against this backdrop, JPMorgan has significantly revised its 2026 gold ETF flow forecast from net inflows of about 400 tons to net outflows of about 50 tons (still net inflows of about 19 tons year-to-date as of June); central bank net purchases forecast has been slightly reduced from 640 tons to 600 tons; and the forecast for global bar and coin demand year-over-year growth has been cut from 10% to 3.6%.

Downside risk concentration scenario: Breaking 4000 could trigger technical selling

JPMorgan explicitly states that the risk structure around the baseline scenario remains clearly tilted to the downside.

In an extreme scenario, if U.S. employment and inflation data remain strong through the summer, the market may re-anchor to a 1999–2000 style rate hike cycle as a reference, in which the Fed cumulatively hiked by about 50–100 basis points, driving an additional 50-basis-point rise in long-term U.S. Treasury yields.

If the market significantly reprices toward this path, gold prices could effectively break below $4,000/oz, triggering trend-following stops and technical selling, further declining to the $3,500–$3,600/oz range.

Beyond interest rate factors, a stronger U.S. dollar also adds pressure. JPMorgan's FX strategy team believes that the "U.S. exceptionalism" narrative is strengthening. If AI-driven productivity divergence further widens the gap between the U.S. and other economies, the dollar could sustain a strong cycle in the second half of 2026, continuously suppressing dollar-denominated gold.

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