Gold sits 25% below its record. What could drive prices next?

Dubai: Gold buyers face a mixed outlook after bullion ended July almost unchanged, with the World Gold Council saying a possible second wave of inflation would not guarantee a major rally in the precious metal.

Gold closed the month at $4,027 an ounce after testing the $4,000 level several times, leaving it 7.8% lower since the beginning of 2026.

The July price was also about 25% below the record of $5,405 an ounce reached on January 29, highlighting the ground bullion would need to recover before returning to its earlier peak.

The next move will depend on how inflation affects real interest rates, the US dollar and expectations for economic growth, together with demand from central banks and Asian investors, according to the council.

Positive price momentum helped support gold during July, with sudden declines often followed by a recovery in subsequent periods.

Those gains were offset by a reduction in risk-related factors, including breakeven inflation and implied market volatility.

Rising yields also weighed on gold by increasing the opportunity cost of holding an asset that produces no income, although a weaker US dollar cancelled out some of that pressure.

Gold remained within a range of 2% in either direction across all major currencies during July.

The metal fell 0.9% in euro terms and 1.6% in pounds, while it gained 1% in Indian rupees and 0.7% in Chinese yuan.

The World Gold Council said a second wave of high inflation, similar to the pattern seen during the late 1970s, could not be ruled out.

The comparison does not mean the current period will follow the same path, since labour unions have less influence, oil plays a smaller role in the economy and the Federal Reserve has a clearer mandate to control inflation.

Another economic shock arriving before inflation expectations have fully normalised could still reignite price pressures.

The council said the risk could come from strategic stockpiling, competition for critical resources and increased government and corporate spending linked to artificial intelligence.

Companies are also passing higher costs on to customers, while inflation expectations among consumers have adjusted upwards.

Near-term disinflation remains possible because the US economy is less robust than it was after the pandemic, leaving it vulnerable to a slowdown if financial conditions remain restrictive.

Gold tends to pay greater attention to inflation once annual price growth moves above 4%, according to the council’s analysis.

Inflation at that level can raise concerns about a policy mistake and encourage investors to seek protection through gold.

Higher inflation does not automatically translate into higher bullion prices because the reaction of interest rates and the US dollar remains critical.

A renewed increase in inflation could support gold if real interest rates fall, the dollar weakens or recession risks rise.

The opposite could happen if the Federal Reserve responds with tighter monetary policy, pushing yields higher and increasing pressure on the metal.

US core inflation stood at 3.3%, moving towards the range where investors may begin to view price growth as more difficult to contain.

The World Gold Council said a repeat of the late 1970s remained unlikely because today’s Federal Reserve would probably respond more quickly to persistent inflation.

Consumers also have less room to absorb another prolonged rise in prices, with the US personal savings rate close to historic lows.

A fresh inflation surge could therefore lead to tighter monetary policy and weaker economic growth instead of a sustained inflationary breakout.

Higher yields could create near-term pressure on gold while investors test the central bank’s willingness to bring inflation back under control.

Longer-term support could emerge if tighter policy weakens growth and eventually pushes longer-dated bond yields lower.

US inflation has become one of several major forces influencing gold, with central-bank purchases and Asian investor demand playing an increasingly important role.

These sources of demand have supported bullion since 2023 despite historically restrictive US real interest rates.

Central banks and Asian investors may also respond differently from investors focused primarily on US economic data, limiting the extent to which American inflation and interest-rate movements determine gold’s direction.

The council said continued purchases from these groups could support prices if slower economic growth eventually pushes yields lower.

Gold’s next sustained move will therefore depend on the combined direction of inflation, real rates, the dollar and economic growth, alongside the willingness of central banks and Asian investors to keep buying.