Gold prices went through a difficult second quarter as inflation pressure, expectations of higher interest rates, and a stronger U.S. dollar weighed heavily on the precious metal. However, according to Invesco’s latest quarterly gold outlook, central bank demand may remain a key factor helping gold end 2026 on a positive note.

Gold’s Worst Second Quarter in 12 Years

According to Invesco, gold prices fell 14.1% in the second quarter, wiping out all gains made in the first quarter. Prices were also more than $1,500 per ounce below the intraday high set in late January.

On June 24, gold fell below $4,000 per ounce for the first time since November 2025. It then fluctuated around this important psychological level and ended the quarter at $4,008 per ounce.

This was gold’s worst quarter since the second quarter of 2013, when the metal dropped 22.7%. However, Invesco noted that such corrections are not unusual after a prolonged strong rally. Despite the sharp decline in Q2, gold was still up 21.3% over the past 12 months.

High Interest Rates and a Stronger Dollar Pressure Gold

According to Invesco analysts, one of the main reasons behind gold’s weakness was rising inflation expectations, which led markets to believe that the Fed may keep interest rates higher for longer, or even continue raising rates.

Higher interest rates are usually negative for gold because gold is a non-yielding asset. When yields and interest rates rise, the opportunity cost of holding gold also increases.

In addition, a stronger U.S. dollar also put pressure on gold prices. When the dollar strengthens, gold becomes more expensive for international investors and consumers outside the United States, which may reduce demand from several important market segments.

Inflation Remains a Major Risk

Invesco said the market is now paying closer attention to inflation risks, especially after energy prices rose sharply due to geopolitical tensions.

WTI crude oil ended the quarter around $70 per barrel, suggesting that markets expect energy supply to gradually recover. However, the key question is whether markets are being too optimistic about inflation cooling down.

According to data cited in the report, U.S. PCE inflation reached 4.1% in May, its highest level since April 2023. Core PCE, which excludes food and energy, also rose to 3.4%, the highest level since October 2023.

This keeps pressure on the Fed to bring inflation back toward its 2% target.

Markets Begin to Price in the Possibility of Fed Rate Hikes

At the start of the year, futures markets still expected the Fed to cut interest rates in 2026. However, persistent inflation pressure has shifted those expectations.

According to Invesco, by the end of the second quarter, markets were pricing in a 33.7% probability of a 25-basis-point Fed rate hike by the end of July. The probability of at least one rate hike before the September FOMC meeting was priced at 67%.

The CME FedWatch Tool also showed an 83% probability that interest rates would be higher than current levels by the end of the year. This remains a near-term headwind for gold.

Central Bank Demand Remains the Main Support

Despite facing several negative factors, Invesco maintained a positive outlook for gold in the second half of 2026. The main reason is the structural demand for gold from central banks.

According to the World Gold Council, 45% of monetary policymakers surveyed said they expect to increase their gold reserves over the next 12 months. At the same time, 89% expect global central bank gold reserves to rise over the coming year.

This shows that gold continues to be viewed as an important reserve asset amid geopolitical uncertainty, elevated inflation, and fluctuating confidence in traditional currencies.

Retail Investment Demand Needs to Be Watched

Invesco also noted that central bank demand is generally less price-sensitive, while retail investment demand is more vulnerable to price movements.

When gold prices rise, capital may continue to flow into the market. But when prices fall sharply, some investors may take profits or sell holdings to reallocate capital to other assets.

Therefore, the reaction of retail investors, especially demand for small gold bars and coins, will be an important factor to watch after the Q2 correction.

Conclusion

Gold has experienced its worst second quarter in 12 years, pressured by high inflation, expectations of Fed rate hikes, and a stronger U.S. dollar. However, this decline does not necessarily change the precious metal’s long-term outlook.

According to Invesco, central bank gold buying remains an important support factor in the second half of 2026. In an environment of geopolitical uncertainty, persistent inflation, and volatile financial markets, gold continues to play a role as a portfolio diversifier and store of value.

In the period ahead, gold’s direction will depend heavily on Fed interest rate policy, movements in the U.S. dollar, actual inflation data, and the sustainability of central bank buying demand.

Source: Kitco