Goldman Sachs: Gold volatility surges significantly, central banks' gold buying will temporarily slow down

The dominant variables in the gold market are shifting from “whether to buy” to “how volatile it is.” Goldman Sachs believes that the diversified demand expressed through gold call options by the private sector has driven up gold price volatility and temporarily suppressed central bank gold purchases, but this decline should be temporary.

Goldman analysts Lina Thomas and Daan Struyven noted in their report this week that rising demand for call options has forced option sellers to passively buy gold to hedge during price increases, mechanically amplifying the gains. More importantly, even a slight pullback could prompt traders to switch from “buying on dips” to “selling on rallies,” triggering stop-loss orders from investors and leading to further losses. Goldman Sachs states this chain was already evident in late January.

Against the backdrop of rising volatility, central bank demand has slowed, with December 2025 purchases at 22 tons, compared to the 12-month average of 52 tons. Goldman 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 appears more like “waiting for volatility to converge” rather than a trend reversal.

For investors, this means short-term downside tail risks are increasing. Goldman warns that after options demand returns to record levels, catalysts that typically cause mild pullbacks could instead trigger larger declines in gold prices, with a downside boundary estimated around $4,700 per ounce. However, in the medium term, Goldman remains bullish on gold, expecting prices to gradually rise to $5,400 per ounce by the end of 2026 under the baseline scenario.

Options structure is boosting volatility; even minor corrections could amplify losses

Goldman links the recent increase in near-term gold price volatility to the private sector’s diversified allocation needs, some of which are expressed through gold call options.

The report cites data from Bloomberg and Goldman Sachs indicating that the open interest in call options on the largest gold ETF, GLD, excluding puts, is at record levels, serving as an important “proxy indicator” for upward volatility.

Mechanically, Goldman explains that when gold prices rise, traders selling call options are forced to buy gold to hedge, amplifying the upward move. Conversely, even a small correction can cause hedging behavior to reverse, switching from “buying on rallies” to “selling on dips,” potentially triggering stop-loss orders from investors and leading to further declines. Goldman warns that similar “stop-loss cascades” occurred in late January.

Central bank demand pauses briefly: December 2025 at 22 tons, below the 12-month average of 52 tons

Goldman notes that rising volatility has transmitted to the central bank side: its nowcast of central bank gold purchases shows December 2025 at 22 tons, compared to the current 12-month average of 52 tons. Previously, Goldman viewed the “continued slowdown in central bank demand” as an important indicator for gold price outlook, but this recent slowdown is considered temporary.

The basis for this includes three points: discussions with central banks, structural changes in reserve management after Russia’s foreign exchange reserves were frozen in 2022, and the view that large emerging market central banks’ gold holdings remain significantly below “possible target levels.”

The report states that reserve managers still see gold as a tool to hedge geopolitical and financial risks, but are more willing to wait until prices stabilize before accelerating purchases.

Two scenario analyses: volatility decline leads to renewed buying; continued volatility risks larger declines

Goldman presents two scenarios to illustrate the “volatility—central bank demand—gold price” pathway.

The baseline scenario assumes no additional diversification from the private sector, with gold price volatility gradually declining. Under this framework, Goldman expects central bank gold purchases to resume their acceleration, maintaining the overall pace seen in 2025; private investors are likely to increase holdings mainly after the Fed cuts rates. The combination of these factors would lead to a “slow rise” in gold prices as volatility converges, reaching $5,400 per ounce by the end of 2026.

The bullish scenario assumes further strengthening of private sector diversification needs, driven by “perceived fiscal risks in some Western economies.” Goldman believes that when such demand is expressed through call options, higher volatility is naturally more likely, which could temporarily (at least) suppress demand from emerging market central banks. In this scenario, Goldman sees significant upside risk for gold prices, but also more persistent volatility.

Tactical warning: mild catalysts could trigger deeper pullbacks, with downside near $4,700

On a tactical level, Goldman states that the demand for call options on GLD rebounded after the late January “shakeout” and is again at record levels. This means that factors typically causing only limited corrections—such as margin-related liquidations or marginal geopolitical easing—could instead trigger outsized declines in gold prices.

Goldman estimates the downside boundary of such a correction around $4,700 per ounce. Additionally, the recent behavior in late January suggests that these pullbacks could be short-lived, as client feedback indicates a potential “wait-and-buy” attitude during dips.

Based on this, Goldman reaffirms its medium-term bullish outlook for gold and maintains its recommendation to go long on gold.

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