Gold volatility has surged significantly, and central banks’ gold purchases will temporarily slow down.
Goldman Sachs believes that rising demand for call options is forcing dealers who sell options to passively buy gold as a hedge during price increases, thereby mechanically amplifying the gains.
More critically, even a minor pullback could prompt dealers to switch from ‘buying the dip’ to ‘selling the rally,’ which may trigger investor stop-loss orders and lead to further losses.
Goldman Sachs warns that moderate catalysts could also trigger deeper retracements, with downside risks targeting $4,700 per ounce.
The dominant variable in the gold market is shifting from “whether to buy” to “how much volatility there is.” Goldman Sachs believes that diversification demand expressed by the private sector through bullish gold option structures has driven up gold price volatility, suppressing central bank gold purchases in the short term. However, this decline should be temporary.
Goldman Sachs analysts Lina Thomas and Daan Struyven noted in a report this week that rising demand for call options forces dealers who sell options to passively buy gold as a hedge during price increases, mechanically amplifying gains. More critically, even a minor pullback could prompt dealers to switch from “buying the dip” to “selling on rallies,” triggering investor stop-loss orders and causing further losses—a chain reaction that Goldman Sachs says was evident in late January.
Amid heightened volatility, central bank demand has slowed, with purchases at 22 tons in December 2025, compared to the current 12-month average of 52 tons. Goldman Sachs emphasized that central banks remain willing to buy gold to hedge against geopolitical and financial risks but prefer to resume purchases after price volatility subsides. Thus, the slowdown is more akin to “waiting for volatility to converge” rather than a structural shift.
For investors, this implies increased downside tail risk in the short term. Goldman Sachs cautioned that once option demand returns to record levels, certain catalysts that typically result in mild pullbacks could trigger sharper declines in gold prices, with an estimated downside boundary near $4,700 per ounce. However, over the medium term, Goldman Sachs reiterated its bullish stance on gold, forecasting prices to gradually rise to $5,400 per ounce by the end of 2026 under baseline assumptions.
Option structures drive up volatility; even minor pullbacks may amplify losses.
Goldman Sachs linked the recent rise in near-term gold price volatility to diversified allocation demand from the private sector, some of which is expressed through bullish gold option structures.
The report cited data from Bloomberg and Goldman Sachs, stating that the largest gold ETF, $SPDR Gold ETF (GLD.US)$, has reached record levels in its net call option open interest (after deducting put options), becoming an important ‘proxy indicator’ for upward volatility.
Mechanically, Goldman Sachs explained that as gold prices rise, dealers selling call options are forced to buy gold to maintain their hedges, amplifying price increases. Conversely, even a slight pullback could reverse dealer hedging behavior, switching from “chasing rallies” to “selling on dips,” potentially triggering investor stop-loss exits and causing further losses. Goldman Sachs reminded that similar “stop-loss cascades” occurred in late January.
Central bank demand experiences a brief pause: 22 tons in December 2025, below the 12-month average of 52 tons.
Goldman Sachs noted that rising volatility has already affected short-term central bank behavior. Its nowcast for central bank gold purchases shows 22 tons in December 2025, compared to the current 12-month average of 52 tons. While Goldman Sachs previously flagged “continued slowing of central bank demand” as a key indicator for gold price prospects, this slowdown is deemed temporary.
Goldman Sachs provided three main reasons: its communication with the central bank, a structural shift in reserve managers’ risk perception following the freezing of Russia’s foreign exchange reserves in 2022, and its view that the gold allocation of major emerging market central banks remains significantly below ‘potential target levels.’
The report states that reserve managers still consider gold a tool for hedging against geopolitical and financial risks, but prefer to wait for price stabilization before accelerating purchases.
Two scenarios: a recovery in gold purchases if volatility subsides, or heightened upside risks if volatility persists.
Goldman Sachs proposed two scenarios to characterize the combination of ‘volatility-central bank demand-gold price trajectory.’
The baseline scenario assumes no additional diversification increment from the private sector, leading to a decline in gold price volatility. Under this framework, Goldman Sachs expects central bank gold purchases to reaccelerate, maintaining a pace broadly consistent with that of 2025; meanwhile, private investors will primarily increase allocations after the Federal Reserve cuts interest rates. Together, these factors result in a ‘gradual rise’ in gold prices amid converging volatility, reaching $5,400 per ounce by the end of 2026.
The upside scenario assumes further strengthening of private-sector diversification demand, driven by ‘perceived fiscal risks in some Western economies.’ Goldman Sachs believes that when such demand is expressed through call option structures, it naturally tends to bring about higher volatility and may temporarily suppress emerging market central bank demand in the short term. In this scenario, Goldman Sachs considers its gold price forecast to carry significant upside risk, alongside more prolonged volatility.
Goldman Sachs’ tactical note: even mild catalysts could trigger deeper pullbacks, with downside support seen at $4,700 per ounce.
On a tactical level, Goldman Sachs noted that $SPDR Gold ETF (GLD.US)$demand for call options has rebuilt after being ‘washed out’ in late January and is once again at record levels. This makes factors that would typically cause limited pullbacks, such as ‘moderate stock market adjustments due to margin-related liquidations’ or ‘marginal cooling of geopolitical tensions,’ capable of triggering unconventional gold price corrections.
Goldman Sachs estimates the downside boundary of such pullbacks to be around $4,700 per ounce. Meanwhile, Goldman Sachs indicated that performance similar to late January suggests pullbacks may be temporary, as client feedback indicates lingering ‘wait-for-a-pullback-to-add’ latent demand.
Based on this, Goldman Sachs reiterated its view that the medium-term trajectory of gold prices remains biased upward and maintained its recommendation to go long on gold.
Editor/Melody
