Gold’s Split Personality: Record Physical Demand Collides With a Hawkish Fed

Gold faces volatile trading as record Chinese and central bank buying clashes with a fractured Fed, surging dollar, and ETF outflows near $4,600/oz.

The gold market is telling two completely different stories right now. One is a tale of insatiable physical demand, with Chinese buyers hoarding bullion at a record pace and central banks adding 244 tonnes to their vaults in the first quarter alone. The other is a cautionary narrative of a fractured Federal Reserve, a surging dollar, and a precious metal struggling to hold its ground above $4,600 an ounce.

Both narratives are true. And the tension between them is creating one of the most volatile trading environments gold has seen in years.

The Fed’s Hawkish Hold Stings Gold

Gold edged higher on Thursday, climbing toward $4,600 an ounce and recovering modestly from a one-month low. Safe-haven bids resurfaced after reports of potential US military action against Iran rattled nerves, but the recovery rests on shaky ground.

The real damage came midweek, when gold slipped below $4,550 after the Federal Reserve’s latest policy decision. The central bank left rates unchanged at 3.50% to 3.75%, which on the surface looked neutral. But four dissenting FOMC members turned what should have been a non-event into a clear warning: rising energy prices are likely to block any further easing for the foreseeable future. Higher interest rates reduce the appeal of non-yielding assets like gold, and the market is now pricing in the possibility of a rate hike in 2027 — a scenario that seemed like a long shot just weeks ago.

The volatility has been staggering. Gold hit an all-time high of $5,589 an ounce on January 28, then closed the first quarter at $4,503 — a nominal year-to-date gain of just 3.1% that does little to capture the wild swings in between.

Physical Demand Hits a Record

While financial investors have been pulling back, the physical market is booming. Bar demand surged to 397.7 tonnes in the first quarter — up 50% year-on-year and the highest quarterly figure since the World Gold Council began tracking the data. China led the charge, with demand jumping 67% to a record 207 tonnes. Europe added 50%, while the US posted a 14% gain.

Central banks are playing their part too. Net purchases hit 244 tonnes in Q1, above the prior quarter and well above the five-year average. The National Bank of Poland was the biggest single buyer, adding 31 tonnes. Goldman Sachs expects central bank buying to settle at around 60 tonnes per month over the long term, dismissing February’s dip to just 2 tonnes as a temporary blip.

The ETF Weak Spot

The soft underbelly of the gold market is the ETF space. Gold-backed ETFs attracted just 62 tonnes of inflows in the first quarter — a 73% decline from the same period last year. The World Gold Council attributes this to significant outflows from US funds in March, precisely when spot prices were peaking. The pattern reveals how quickly Western financial investors pull the rip cord when prices correct.

Goldman Warns of Further Weakness

Goldman Sachs is sticking with its year-end target of $5,400 an ounce, but strategists Lina Thomas and Daan Struyven caution that gold remains vulnerable to further liquidation in the near term — especially if disruptions in the Strait of Hormuz persist and equities or bonds continue to correct. Iran’s latest ceasefire offer collapsed after President Trump rejected the terms, keeping geopolitical risk firmly on the table.

The current price of around $4,636 sits roughly 15% below the 52-week high of $5,450 and just under the 50-day moving average — a technical picture that reinforces the analysts’ tactical caution.

The Oil-Fed Paradox

The central irony of the current setup is hard to miss. Rising oil prices — Brent crude briefly topped $126 a barrel this week, its highest in four years, after the US naval blockade effectively closed the Strait of Hormuz — are fueling inflation, which in turn forces the Fed into a more restrictive stance. That weighs on gold and silver, even though the very geopolitical crisis driving oil higher would normally support precious metals.

Silver has been hit hardest, extending its losing streak to three sessions and widening intraday losses to 2.45%. As a rate-sensitive asset, silver reacts more sharply to shifting monetary policy expectations than gold does.

What’s Next for Gold

Gold’s path forward hinges on two variables: the Iran conflict and the Fed’s next move. As long as the Strait of Hormuz remains effectively closed, Brent crude will likely stay elevated, keeping upward pressure on inflation and downward pressure on rate-cut expectations. For gold, the next Fed communication will determine whether the interest-rate headwind eases or intensifies.

The scenario spectrum is wide. Goldman sees a sustained Hormuz disruption combined with an equity correction potentially dragging gold to around $3,800 an ounce. On the flip side, if the diversification away from Western assets accelerates, the bank sees room to $6,100. A Reuters poll of 31 analysts puts the median 2026 forecast at $4,916 — the highest annual figure ever recorded in that survey since it began in 2012.

Mine production hit a first-quarter record of 885 tonnes, while recycling rose only modestly despite high prices — a sign of tighter overall market conditions. J.P. Morgan sees gold reaching around $5,000 by the fourth quarter of 2026, supported by expected quarterly demand of 585 tonnes from central banks and investors. State Street identifies $4,400 to $4,600 as a strong near-term support zone, with a base case of $4,750 to $5,500 and a bull case as high as $6,250.

The key question remains whether gold can reclaim and defend the $5,000 level — or whether the interest-rate cycle will keep the upper hand.