Shakeout in the gold price and correlation with risk appetite leaves central banks as its main buyers

By Jules Rimmer

The recent association of gold with more general risk appetite in markets may deter ETFs from adding to positions in the downtick.

Central banks have been a powerful driver behind gold's rally in the last five years and with ETFs stepping back for the time being, the way is clear for them to buy into the correction.

Despite its historical reputation as a portfolio diversifier, gold (GC00) has developed a positive correlation with risk of late. High realized volatility in the gold price and its dwindling momentum may discourage the exchange-traded funds whose inflows had been the primary driver of recent strength, leaving central banks as the main bider in the market.

This explains why Deutsche Bank has pinned a $4,000-per-ounce average price target on gold in 2026, while adopting a strategically bullish bias and anticipating potential upside to that forecast.

That prediction was made by analyst Michael Hsueh in a Tuesday note, as he outlined his expectation that the moderation in gold price strength - it has fallen 10% from its Oct. 20 peak of $4,381 - may also lead to a revival in jewelry demand, which is notoriously price sensitive and which has dropped by 18% in 2025.

Hsueh noted the linkage between the S&P 500 SPX and gold is a relatively recent phenomenon and has increased since 2020.

Gold's image as a portfolio diversifier has shifted in the last few years.

Its reputation as a risk-reducing portfolio diversifier has shifted somewhat. Since expectations for the next Fed cut in December have started falling, the money flowing into exchange-traded funds has dried up. Hsueh said that, until volatility declines or the Fed actually cuts rates, these investors will be reluctant to recommit funds to gold ETFs.

In Hsueh's mind, this clears the way for reserve managers at central banks to step in, "given their theoretically infinite investment horizon" and a major source of "inelastic demand growth since 2021." Hsueh wrote that central-bank demand is the primary driver of gold's outperformance compared with financial-model projections. He also contended that China is the secret identity behind "unreported global official demand."

Gold's pullback in the last month may stimulate consumers to renew jewelry consumption, according to Hsueh. This, in turn, may be countered by an increased supply of recycled gold.

-Jules Rimmer

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11-18-25 0905ET