Goldman Sachs: Gold volatility surges, central bank gold purchases will temporarily slow down

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The dominant variable in the gold market is shifting from "whether to buy" to "how volatile it is." Goldman Sachs believes that diversified demand from the private sector, expressed through bullish gold option structures, has increased gold price volatility and temporarily suppressed central bank gold buying, but this decline should be temporary.

Goldman Sachs analysts Lina Thomas and Daan Struyven noted in a report this week that the rise in call option demand forces option sellers to passively buy gold for hedging during the rally, mechanically amplifying the rise. More critically, even a small pullback may prompt these traders to shift from "buying on gains" to "selling on declines," triggering investor stop-loss orders and leading to further losses; Goldman Sachs notes this chain reaction was already observed in late January.

Against a backdrop of rising volatility, central bank demand has slowed, with 22 tons in December 2025, compared to a current 12-month average of 52 tons. Goldman Sachs emphasizes that central banks are still willing to buy gold to hedge geopolitical and financial risks, but prefer to resume purchases after price volatility subsides. Therefore, the slowdown is more like "waiting for volatility to converge" rather than a trend reversal.

For investors, this means short-term downside tail risks are rising. Goldman Sachs points out that after option demand returns to record levels, some catalysts that would normally only cause moderate pullbacks could trigger larger gold price corrections, with the estimated downside boundary around $4,700/oz. But in the medium term, Goldman Sachs still reiterates its bullish stance on gold, expecting prices to gradually rise to $5,400/oz by the end of 2026 in its base case scenario.

Option Structures Push Up Volatility, Even Small Pullbacks May Amplify Losses

Goldman Sachs links the recent rise in gold price volatility to diversified allocation demand from the private sector, with some expressed through bullish option structures on gold.

The report cites data from Bloomberg and Goldman Sachs showing that the open interest of GLD bullish options, after netting out puts, is at record levels, making it an important "proxy indicator" for rising volatility.

Mechanically, Goldman Sachs says that when gold prices rise, call option sellers are forced to buy gold to maintain hedges, amplifying the rise. However, even a small pullback could cause traders to reverse hedges—from "chasing the rise" to "selling on declines," possibly triggering investors' stop losses and causing further losses. Goldman Sachs reminds that similar "stop-loss cascades" occurred in late January.

Central Bank Demand Pauses Briefly: 22 Tons in December 2025, Below 12-Month Average of 52 Tons

Goldman Sachs points out that the rise in volatility has already affected central bank short-term actions: their nowcast of central bank gold demand shows 22 tons in December 2025, compared to the current 12-month average of 52 tons. Goldman previously viewed "continued slowing in central bank demand" as an important indicator for gold price prospects, but this pause is assessed as temporary.

Goldman’s rationale includes three points: their communications with central banks; structural changes in risk perception among reserve managers following the freeze of Russia’s foreign reserves in 2022; and their view that gold allocations by large emerging market central banks remain significantly below "potential target levels."

The report states that reserve managers still see gold as a tool to hedge geopolitical and financial risks, but prefer to accelerate buying once prices stabilize.

Two Scenarios: If Volatility Falls, Central Bank Buying Resumes; If Volatility Continues, Upside Risks Increase

Goldman Sachs presents two scenarios sketching the relationship between volatility, central bank demand, and gold price trajectory.

The base case scenario is that private sector demand for diversified allocation does not increase further, leading to subsiding gold price volatility. In this framework, Goldman expects central bank gold purchases to reaccelerate, generally resuming the 2025 pace; private sector investors mainly increase allocation after the Fed cuts rates. In combination, gold prices “rise gradually with volatility contracting” to reach $5,400/oz by the end of 2026.

The upside scenario assumes private sector diversification demand strengthens further, driven by "perceived fiscal risks in some Western economies." Goldman believes that when this demand is expressed through call option structures, it tends to bring about higher volatility and may (at least temporarily) suppress emerging market central bank demand. In this scenario, Goldman thinks there are notable upside risks for gold price forecasts, but volatility will also persist.

Goldman Tactical Tip: Mild Catalysts Could Trigger Deeper Pullbacks, Downside Boundary at $4,700/oz

Tactically, Goldman says that after the “wash out” of GLD call option demand in late January, positions have been rebuilt and are again at record highs. This means some factors that would usually only cause mild corrections—such as “moderate equity market adjustments due to margin-related liquidations” or “marginal easing of geopolitical tensions”—could now lead to outsized gold price pullbacks.

Goldman estimates that the boundary for such pullbacks is around $4,700/oz. At the same time, Goldman says that, as seen in late January, these corrections may be brief since client feedback shows there remains potential demand "waiting for a pullback to add positions."

Based on this, Goldman reiterates that the medium-term path of gold prices remains upward, maintaining its long gold recommendation.

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