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Gold (XAU/USD) delivered a masterclass in volatility in the first half of the year, rising more than 20% in the January-February period before entering a downtrend that saw the precious metal lose nearly 30% from March to the end of the second quarter. As the second half of the year begins, Gold’s next major move could spark a powerful comeback or push the metal toward its worst annual performance since 2013.

Why Gold lost its safe haven status 

Gold started the year on a bullish note and set a new record-high near $5,600 in late January. 

Growing expectations for a dovish Federal Reserve (Fed) policy outlook, with Kevin Warsh becoming the front-runner to replace Chairman Jerome Powell, weighed on United States (US) Treasury bond yields and the US Dollar (USD), fuelling Gold’s rally. 

Additionally, escalating tensions in the Middle East, with the US threatening military intervention in Iran following severe domestic crackdowns on protestors and failed diplomatic efforts regarding Iran’s ballistic programme, allowed Gold to find demand as a traditional safe-haven.

By the final trading day of January, Gold declined sharply but still gained about 13% for the month. The confirmation of Warsh’s nomination triggered a “buy the rumor, sell the fact” action, while investors also realized that Warsh was in favor of strict monetary discipline and that he was unlikely to become a “yes-man” for US President Donald Trump, who insisted on the Fed to cut interest rates. 

Still, Gold preserved its bullish momentum in February as the latest decline drew renewed interest, especially from institutional buyers. “Global physically backed Gold ETFs registered another month of inflows in February, adding US$5.3 billion – the strongest two-month start to a year and the ninth consecutive monthly increase, as investors continued to build allocations amid elevated geopolitical risk and shifting macro conditions,” the World Gold Council (WGC) noted in its monthly report for February.

However, things changed drastically when Israel and the US carried out a joint military operation against Iran on February 28.

Gold quickly lost its “safe-haven” status and turned south, as surging crude Oil prices fed into inflation fears. After losing nearly 12% in March, Gold stabilized but still registered marginal losses in April and May. The announcement of a temporary two-week ceasefire between the US and Iran in early April, then the extension of this ceasefire indefinitely, helped Gold keep its footing.

Although the US and Iran signed a Memorandum of Understanding (MoU) to establish a 60-day ceasefire and reopen the Strait of Hormuz fully on June 17, Gold remained under heavy bearish pressure and lost nearly 12% in June. Strong inflation readings and upbeat labor market data from the US, combined with new Fed Chair Kevin Warsh’s clear message that they will prioritize taming inflation, attracted bets for the US central bank to raise rates and dragged XAU/USD to a fresh 2026-low below $4,000.

Gold daily chart

Three scenarios for Gold and what to look at in the second half of 2026

The first half of the year showed that Gold’s declaration of its geopolitical premium has left it entirely exposed to raw macroeconomic forces. Hence, navigating the second half of the year will require a close examination of inflation dynamics and how they could influence the policy outlook of major central banks, while assessing how institutional interest could support prices.

The bullish case for Gold

For Gold to rally in the remainder of the year, the market theme needs to go through a noticeable shift. June’s action showed that a sharp decline in Oil prices might not be enough to boost Gold. There has to be a convincing dovish shift in major central banks’ policy outlook, especially the Fed, to fuel a steady uptrend in the precious metal.

The first condition that needs to be met is that there has to be a permanent end to the conflict in the Middle East. Although many experts think that it will take some time for energy supply to be restored to pre-war levels, markets will be relieved knowing that a strong increase in Oil prices is unlikely. 

Peace needs to be followed by consecutive months of favorable inflation readings from the US. Once Fed officials start voicing their confidence in inflation returning toward their target of 2%, markets could move away from pricing in a rate hike and even consider a rate cut in early 2027. In this scenario, Gold could benefit from falling US T-bond yields and the renewed USD weakness. 

According to the CME FedWatch Tool, markets are currently pricing in about an 85% probability that the Fed will raise its policy rate by at least 25 basis points (bps) by end-2026