The primary driver in the gold market is shifting from "whether to buy" to "the extent of volatility." Goldman Sachs believes that diversification demand expressed by the private sector through gold call option structures has increased price volatility and is suppressing the pace of central bank gold purchases in the short term, though this slowdown is expected to be temporary.
Analysts Lina Thomas and Daan Struyven noted in a report this week that rising demand for call options forces dealers who sold these options to buy gold as a hedge during price increases, mechanically amplifying the rally. More critically, even a minor pullback could prompt these dealers to switch from "buying on strength" to "selling on weakness," potentially triggering investor stop-loss orders and leading to further losses. Goldman Sachs indicated this chain of events was observed in late January.
Amid elevated volatility, central bank demand has slowed, with purchases totaling 22 tonnes in December 2025, compared to the 12-month average of 52 tonnes. The firm emphasized that central banks remain willing to buy gold to hedge against geopolitical and financial risks but prefer to resume accelerated purchasing once price volatility subsides. Therefore, the current slowdown is seen more as "waiting for volatility to converge" rather than a structural shift in trend.
For investors, this implies increased short-term downside tail risks. Goldman Sachs cautioned that with option demand back at record levels, catalysts that typically cause only mild pullbacks could now trigger more significant gold price declines, with an estimated lower boundary around $4,700 per ounce. However, the firm maintains a bullish medium-term outlook, projecting gold prices to gradually rise to $5,400 per ounce by the end of 2026 under its base case scenario.
The recent increase in gold price volatility is linked to private sector diversification demand, partly expressed through call option structures. Data cited in the report shows that net call open interest for GLD, the largest gold ETF, is at a record high, serving as a key proxy for rising volatility.
Mechanically, when gold prices rise, dealers who sold call options are forced to buy gold to maintain their hedges, amplifying the upward move. Conversely, even a modest pullback could reverse dealer hedging behavior from "chasing rallies" to "selling dips," potentially triggering investor stop-losses and causing further losses. A similar "stop-loss cascade" was observed in late January.
The rise in volatility has impacted short-term central bank behavior: their nowcast for central bank gold demand showed 22 tonnes in December 2025, below the 12-month average of 52 tonnes. While Goldman Sachs previously identified "sustained slowing in central bank demand" as a key monitor for gold's outlook, the current slowdown is judged to be temporary.
This assessment is based on three factors: dialogue with central banks, a structural shift in reserve managers' risk perception following the freezing of Russian foreign reserves in 2022, and the view that gold allocations at major emerging market central banks remain significantly below "potential target levels." Reserve managers still view gold as a tool for hedging geopolitical and financial risks but prefer to wait for price stability before accelerating purchases.
Goldman outlined two scenarios for the "volatility—central bank demand—gold price path" dynamic. The base case assumes no additional incremental diversification demand from the private sector, leading to a decline in gold volatility. In this framework, central bank buying is expected to re-accelerate, maintaining a pace similar to 2025, while private investors increase allocations mainly after Federal Reserve rate cuts. Combined, this would lead to a "slow grind higher" in gold prices, reaching $5,400 per ounce by end-2026.
The upside scenario assumes further strengthening in private sector diversification demand, driven by "perceptions of fiscal risks in some Western economies." When such demand is expressed through call option structures, it naturally fosters higher volatility and may temporarily suppress emerging market central bank demand. Under this scenario, Goldman sees significant upside risk to its gold price forecast, though volatility would also be more persistent.
On a tactical level, call option demand for GLD has rebuilt after being washed out in late January and is again at record levels. This means factors that typically cause limited pullbacks—such as "mild equity adjustments due to margin-related liquidations" or "marginal de-escalation in geopolitical tensions"—could now trigger larger-than-usual gold price declines. The estimated lower boundary for such a pullback is around $4,700 per ounce. However, similar to the late January experience, any decline may be brief, as client feedback indicates underlying demand from investors "waiting for a dip to add exposure."
Based on this, Goldman Sachs reaffirms its medium-term bullish trajectory for gold and maintains its recommendation to be long gold.