Maybe Central Banks Are Gold-Price Sensitive After All
Which is a very good thing
For a while now, analysts (including this one) have been predicting that central banks will keep buying gold regardless of its price, thereby smoothing out the normal ups and downs in that market.
But recent action implies that central banks do care about what they’re paying for gold — which, at this point in the cycle, is a good thing. Drawing on work from Goldman Sachs and Goldfix, here’s the story:
Central banks aggressively bought gold in the first few years of this decade, when it was hitting resistance at $2,000/oz (insanely cheap in retrospect). Then, when gold took off in 2024, the banks scaled back their buying.
Then — the important part for our purposes — when gold corrected in 2026, the central banks stepped up their buying.
This looks like bargain hunting, with China setting the pace:
The following bullet points are from Goldfix:
Goldman Sachs estimates central banks bought 81 tonnes of gold in May, with its three-month seasonally adjusted pace rising to 67 tonnes per month, nearly four times the pre-2022 average of 17 tonnes.
China was the largest identifiable buyer at an estimated 48 tonnes. Goldman says the renewed acceleration in official demand should help establish a floor beneath gold while hawkish Federal Reserve pricing pressures the market.
Goldman maintains its $4,900 per ounce end-2026 forecast. Emerging-market reserve diversification remains the structural anchor, while the bank expects the current rates-related headwind to fade because its economists forecast no Fed hikes.
Medium-term risks remain skewed higher. Private portfolios still hold relatively little gold, while geopolitical fragmentation and concerns over Western fiscal sustainability could broaden diversification beyond central banks.
Some Caveats
The outlook for inflation, growth, and interest rates is muddled by the Iran war. When the short-lived ceasefire took effect, oil prices plunged, and the June CPI fell by 0.4%, which made a Fed rate hike less likely.
When the shooting resumed, oil prices spiked, presumably pushing the next CPI reading back above the Fed’s target range.
The result: Near-term economic growth, inflation, and Fed behavior are a muddled, unpredictable mess, which might impact the gold price along with everything else.
Meanwhile, central bank gold buying is partially self-reported, and Chinese stats are notoriously self-serving and unreliable. So we shouldn’t put absolute trust in any given month’s numbers.
Think of central bank gold buying as one data point among many. Though right now, it’s a very positive data point.
Goldman Sachs estimates central banks bought 81 tonnes of gold in May, led by 48 tonnes of identifiable Chinese demand. The bank says official accumulation should provide a price floor during temporary Fed-related weakness, while reserve diversification, geopolitical fragmentation and low private allocations support its $4,900 end-2026 target.
The US theft of Russian foreign-exchange reserves in 2023 marked the beginning of the end of Bretton-Woods and the acknowledgment of the beginning of the multipolar financial world that we currently see evolving in front of our eyes. The "neutral world reserve asset is now gold and the only remaining current question is whether any government is going to be able to "credibly" back their currency with physical gold - because currently no government would be "trusted" to keep its exchange "pledge" under any and all circumstances.
One more thing about the subject of "unaffordability"
No politician that I am aware of has a complete understanding of what underlies the financial difficulties of a growing number of Americans.
The Republicans generally think it’s inflation, but only inflation more than 2% per year as desired by the Fed. Furthermore, most of them also mean by “inflation” the increases of prices, as measured by the CPI, but never monetary inflation, as measured by the money supply (e.g., M2). To them, stimulating economic growth and controlling prices is the solution.
The Democrats - and many voters in general - generally think it’s inequitable wealth distribution. To them re-distribution of wealth is the answer, hence calls for even more “progressive”, socialistic policies of government controlled entitlements, as echoed by the “radical” Democrat candidates.
Such arguments remind me of one of my favorites quotes, and from John Maynard Keynes, the architect of our “modern” fiat debt-based monetary system, who quoted Vladimir Lenin, of all people:
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
― John Maynard Keynes, The Economic Consequences of the Peace
Now, just because Lenin said that, and Keynes agreed with it, doesn’t necessarily mean it’s true. However, I think it is very true. But the problem is, if indeed “not one man in a million can diagnose” the problem of societal collapse into communism, then what chance does a politician have to explain it clearly enough to enough voters to make a difference?
That’s why “Marxists” are essentially correct in saying democracies and capitalism are inevitably doomed because the monetary system can be corrupted in ways that are hard to understand and perhaps even harder to avoid, since people are corruptible, and only a few powerful ones are needed.
That is why the “debate” between Republican/Capitalist/Conservatives and Democrat/Socialist/Progressives are futile. Neither group is addressing the fundamental flaw which is our debt-based fiat monetary system that requires constant devaluation of the currency. In fact, since the US already has a corrupted, inherently devaluing monetary system, the Marxists have fertile ground to promote and justify their insidious ideas. The heavy lifting was done years ago in the early 20th century with the advent of central banking and the taxation of citizens' income.
Furthermore, neither “Party” actually holds philosophically opposite premises. Both groups (as do the vast majority of humans, as far as I can tell) believe in the morality of subjugating the rights of the individual for the sake of the majority; they differ only in degree. But in any argument in which both sides share the same premises the winner will always be the one that is most consistent with those premises. Hence the constant slide from liberty and free-market capitalism (aka “individualism”) to government controlled production and distribution (aka “collectivism”), all in the name of “compromise”.
It's a mess.