Central-Bank Gold Buying and Reserve Diversification Reinforce the Bullish Case for Gold

Overview

This report discusses the choice of storage locations for central-bank gold reserves and its implications for gold demand. Goldman Sachs believes that liquidity needs will keep the Bank of England and the Federal Reserve Bank of New York as key custody locations, but geopolitical and jurisdictional risks are prompting central banks to increase storage-location diversification. This structural trend, together with sustained central-bank gold purchases and recovering investment demand, underpins its bullish view on gold.

Core views

Holding gold in overseas custody provides central banks with immediate market access, U.S.-dollar swap liquidity, and gold-lending income, but also exposes them to political risks such as asset freezes or restricted access; storing all gold domestically may instead create domestic political, physical-security, audit, and insurance risks. Therefore, allocation across multiple jurisdictions is viewed as a solution that balances liquidity with risk diversification. The report estimates central-bank net gold purchases at 57 tonnes in June and expects emerging-market central banks to continue diversifying reserves through gold following the freezing of Russia's foreign-exchange reserves in 2022.

Analysis framework

The report combines World Gold Council surveys, estimates of central-bank gold purchases, changes in London vault holdings, and a gold-pricing framework. The pricing framework focuses on Western ETF holdings, COMEX managed-money positions, and demand for macro-policy hedging options, while incorporating monetary-policy expectations, geopolitics, and central-bank reserve allocation.

Methodology notes

• Demand Analysis FrameworkGold Pricing Framework

  Three pillars of investor demand

  Measures marginal investor demand for gold through Western ETF holdings, COMEX managed-money net positions, and demand for macro-policy hedging options.

• High-Frequency EstimationGS Estimate of Central-Bank Gold Purchases

  Estimate of central-bank gold purchases

  Estimates monthly central-bank gold purchases based on identifiable buying and related flow data, and uses a three-month seasonally adjusted measure to assess trends.

• Reserve Risk ManagementCross-Jurisdictional Custody Diversification

  Liquidity and political-risk trade-off

  Compares major overseas custody, domestic storage, and multi-location custody in terms of market liquidity, jurisdictional risk, physical security, and operating costs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Gold

  Direct beneficiary asset

  Strengths

  Continued central-bank gold purchases, diversification of reserve storage locations, recovering investor demand, and reduced pressure from interest-rate expectations all support demand.

  Weaknesses

  Prices are already near $4,400/toz, making short-term performance sensitive to changes in real rates, the U.S. dollar, positioning, and policy expectations.

  Comparison

  Compared with a scenario fully dependent on private investment inflows, central-bank diversification provides more structural demand support; compared with domestic-only storage, cross-border custody diversification preserves liquidity advantages.

  Risks

  Central-bank purchases fall short of expectations, the Fed shifts to a tighter policy stance, the U.S. dollar strengthens, investor ETF and futures demand declines, or geopolitical risks ease.

Key data

• Estimated central-bank gold purchases in June 202657 tonnesAbove the pre-2022 average of 17 tonnes per month.
• Three-month seasonally adjusted trend in central-bank gold purchases100 tonnes/monthThe report states that the gold-buying trend has accelerated.
• China's identifiable gold purchases in June40 tonnesThe largest identifiable buyer during the month.
• Monetary gold inflows into London32 tonnesThe report is more inclined to interpret this as custody transfers rather than sales.
• Monthly change in foreign official gold holdings at the Bank of England+98 tonnesSufficient to absorb central-bank gold inflows into London.
• Assumed average monthly central-bank gold purchases in 202650 tonnes/monthGoldman Sachs maintains this forecast assumption.
• Assumed average monthly central-bank gold purchases in 202740 tonnes/monthGoldman Sachs maintains this forecast assumption.
• End-2026 gold target price$4,900/tozThe report's structural bullish forecast.
• Recent gold priceNear $4,400/tozApproximately 10% above the mid-July low.
• Bank of England custody utilization rate57%Share of surveyed central banks reporting that they store part of their gold reserves at the Bank of England; 14% for the Federal Reserve Bank of New York.

Impact & implications

For gold, central-bank reserve diversification is not short-term transactional demand, but rather a multi-year structural source of demand. Gold prices could receive further support if central banks sustain elevated purchases, U.S. monetary-policy-related headwinds continue to fade, and geopolitical risks spread into private investors' asset-allocation decisions.

Risks

• Actual central-bank gold purchases may be below current estimates or the report's assumptions.
• If markets reprice higher interest rates or Fed tightening, rate-sensitive gold ETF demand may come under pressure.
• A stronger U.S. dollar, rising real rates, or the unwinding of speculative positions could weigh on gold prices.
• Gold custody and reserve reallocation are affected by political, legal, and operational arrangements, creating uncertainty in the interpretation of flow data.
• The report's price target depends on sustained reserve diversification and recovering investment demand; a reversal of these trends would weaken the bullish case.

What to watch

• Subsequent monthly central-bank gold-purchase data, particularly China's identifiable purchases.
• Changes in gold inventories at the Bank of England, the Federal Reserve Bank of New York, and London vaults outside the Bank of England, to distinguish custody transfers from actual sales.
• Western gold ETF holdings, COMEX managed-money net positions, and demand for gold-option hedging.
• The impact of Fed policy, inflation, and employment data on interest-rate expectations.
• Geopolitical events and their impact on reserve-diversification demand from central banks and the private sector.