Central Banks' Record Gold Appetite Can't Offset Fed's Hawkish Chill

Central banks hoard gold at record pace, but spot prices fall 6% as the Fed turns hawkish and a US-Iran peace deal dims safe-haven demand. Major banks remain bullish.

A schizophrenic picture is playing out across the gold market. Behind the scenes, central banks are hoarding the metal at an unprecedented clip — 89% of reserve managers surveyed by the World Gold Council expect global gold holdings to rise, and nearly half of the 74 institutions polled plan to add to their own reserves over the next twelve months. That marks the highest reading since the survey began in 2018. Yet at the same time, the spot price is wilting, trading around $4,247.30 an ounce and down roughly 6% over the past month as the Federal Reserve turns unexpectedly hawkish.

The diverging forces are most visible in the physical flow of gold. Sovereign buyers collectively scooped up a net 244 tonnes in the first quarter alone, maintaining the run of roughly 1,000 tonnes per year that began in 2022. Poland’s central bank led the charge in April with 14 tonnes, while the People’s Bank of China added another eight tonnes, extending its unbroken buying streak to 18 months. India, meanwhile, slashed the share of its reserves held abroad from 55% to 22%, a move widely interpreted as diminishing trust in international custodians. In Germany, the far-right AfD has revived calls for the complete repatriation of the country’s gold holdings.

This sovereign demand surge is reshaping the broader market. For the first time, physical investment — bars, coins and exchange-traded products — has overtaken jewellery as the largest source of demand. Bar purchases alone jumped 20% quarter-on-quarter in the first three months of 2025, and total physical investment is forecast to rise 15% this year. Jewellery demand, by contrast, is collapsing at a double-digit pace.

None of that strength, however, is showing up in the price. The yellow metal finished Thursday at $4,247.30, well below its 50-day moving average of $4,565 — a gap of nearly 7%. The culprit is clear: the Federal Reserve under new chair Kevin Warsh has slammed the door on rate cuts and is now actively contemplating hikes. Nine of the 18 Fed members project the federal funds rate will end this year above the current range, and the median estimate has jumped to 3.8%. The two-year Treasury yield reacted instantly, climbing to 4.21%, while the dollar strengthened — both classic headwinds for gold.

Adding to the pressure, a tentative peace accord between the United States and Iran has sapped the metal’s safe-haven appeal. The agreement, which aims to reopen the Strait of Hormuz, sent equity markets higher and dimmed the geopolitical premium that had propped up gold. The same deal is expected to cool oil prices, which had pushed U.S. headline inflation to 4.2% in May. Core inflation, however, remained subdued at 2.9%, leaving the Fed in a bind: it cannot fight oil-driven inflation with higher rates, and that ambiguity is keeping discretionary investors on the sidelines.

Despite the technical and macroeconomic headwinds, major investment banks are refusing to abandon their bullish calls. Goldman Sachs continues to estimate monthly central bank purchases at roughly 60 tonnes and has set a year-end 2026 target of $5,400 per ounce. J.P. Morgan is even more aggressive, forecasting an average price of $6,000 in the fourth quarter of 2026 and a further climb to $6,300 by the end of 2027. Both banks argue that the structural shift away from the U.S. dollar as a reserve asset will sustain sovereign buying long after the current Fed tightening cycle has run its course.

For now, the market is caught in a tug-of-war. The floor provided by central bank accumulation is real — but it is not yet strong enough to lift prices through the ceiling of higher-for-longer interest rates. Until the Fed blinks or the geopolitical picture turns again, the bullion market will have to live with this split personality.