Still Bullish on Gold

Gold Market Dynamics and Forecasts

• Private investors and central banks are competing for limited gold bullion, accelerating value gains in 2025.
• Two primary drivers for private investor entry: declining Fed rates reducing opportunity costs and "debasement trade" fears regarding fiscal sustainability in Western economies.
• Gold volatility is increasingly driven by call option activity, which surged vertically in January 2025 following headlines.
• Dealer hedging mechanics create a self-reinforcing rally as rising prices force dealers to buy physical gold; this dynamic reversed in late January when Fed announcements eased worries.
• Post-correction selling pressure was exacerbated by dealers unwinding hedges and cascading stop-loss triggers.
• Goldman Sachs maintains a bullish stance with a 2026 price forecast of $5,400.
• The current forecast assumes continued central bank buying and private investment driven by Fed cuts but excludes potential diversification flows.
• Significant upside risk exists if further diversification flows materialize, though this may result in sharper price volatility.

Silver Market Liquidity Constraints

• Silver experienced a roughly 35% decline amid a severe liquidity squeeze rather than a fundamental demand failure.
• London's vaults operate with approximately 50% allocated inventory and a vanishing 50% liquidity buffer.
• A major portion of the liquidity buffer was relocated to the US in anticipation of potential silver tariffs, creating a supply dislocation.
• Renewed investor demand in mid-2025, fueled by the "Ketchup trade" (gold) and debasement themes, exhausted remaining liquidity buffers.
• Price action is characterized by extreme volatility, spiking on new demand waves and crashing sharply on investor pullbacks due to low liquidity depth.
• Goldman Sachs expects the liquidity deficit in London to persist, sustaining extreme price action for the foreseeable future.

Broader Commodities and Super Cycle Analysis

• Geopolitical risk is prompting "insurance demand" and stockpiling across various commodity markets, including copper, driven by tariffs and state-backed investments.
• Market fragmentation from these security policies is increasing volatility in non-precious metal sectors.
• Goldman Sachs does not anticipate a broad commodity super cycle comparable to gold due to the scalability of non-precious assets like copper.
• Unlike gold, which has constrained production, higher prices in copper and similar commodities incentivize new supply coming online, capping long-term price sustainability.
• Goldman Sachs prefers gold over silver due to stronger conviction in gold's structural demand from central banks and institutions, and silver's unmanageable volatility profile.

Forward-Looking Indicators

• Key data points to monitor in 2026 include the volume of central bank purchasing, which may dampen due to high market volatility.
• Tracking call option demand remains critical for gauging potential for rapid price rallies or sharp corrections.