Goldman Sachs: The Federal Reserve's slowdown in interest rate hikes has affected the pace of gold's rise, but it does not change the long-term bullish structure

Author: Dong Jing
Despite the Federal Reserve just announcing an interest rate hike and Goldman Sachs economists predicting another hike in October, the Goldman Sachs Global Commodities Research team remains steadfast in maintaining the target price of $5,400 for gold by the end of 2027.

According to news from the Wind Trading Desk, Goldman Sachs conveyed a clear message to the market in its latest precious metals report on September 18: Tightening policies will only slow the short-term upward momentum of gold, but will not end its long-term bullish trend. The pressure from interest rate hikes has largely been absorbed by the market, and gold still has upward potential.

The report states that currently, the structural gold buying frenzy by global central banks and the demand for call options driven by concerns over the fiscal sustainability of G10 countries are building an extremely solid bottom for gold prices.

Goldman Sachs expects that the fair value of gold will reach $4,650 per ounce by the end of this year (significantly higher than the current spot price of about $4,350). Additionally, investors need to be highly vigilant about the mechanical surge (short squeeze) risk that may arise from the hedging behavior of options market traders, as well as the speculative volatility before and after the U.S. midterm elections.

Limited Impact of Rate Hikes: Recent Path Slows, Terminal Target Unchanged

Goldman Sachs clearly pointed out in the report that despite the Federal Reserve announcing its first interest rate hike in three years and Goldman Sachs economists predicting an additional hike in October, the terminal target price of $5,400 per ounce for gold by the end of 2027 remains unchanged.

Goldman Sachs' judgment logic is that: The impact of tightening monetary policy will mainly manifest as a slowdown in the recent appreciation path of gold, rather than a decline in the terminal price. Goldman Sachs economists expect the Federal Reserve to implement three rate cuts between September 2027 and March 2028, with the terminal rate forecast remaining at 3.25%-3.5%.

For this reason, Goldman Sachs has revised its fair value forecast for gold at the end of 2026 from the previous $4,900 per ounce down to $4,650 per ounce, but this figure is still significantly higher than the current spot price of about $4,350 per ounce. The report also notes that the anticipated tightening of monetary policy has largely been absorbed by ETF demand, indicating that the marginal suppressive effect of rising interest rates on gold prices is weakening.

Central Bank Gold Purchases: The Core Structural Driver of the Gold Bull Market

Goldman Sachs' report characterizes the continuous gold purchases by central banks as the primary structural driving factor behind the bullish logic for gold, contributing to the expected approximately 23% increase by the end of 2027.

Goldman Sachs' real-time tracking model for central bank gold purchases (Nowcast) shows that the current pace of central bank gold purchases is about 91 tons/month (seasonally adjusted three-month average), far exceeding the historical average of 17 tons/month before 2022, with an increase of over five times.

Based on this accelerating trend, Goldman Sachs has raised its central bank demand assumptions:

• Previous forecast: 50 tons/month in 2026, 40 tons/month in 2027
• Latest forecast: Average of 60 tons/month in 2026-2027

Goldman Sachs believes that the diversification demand for global central bank reserves triggered by the freezing of Russian central bank assets in 2022 is a structural rather than cyclical shift, and recent communications with several central banks have confirmed their continued strong demand for gold.

Resilient Demand for Call Options Provides Additional Support for Gold Prices

The report pays special attention to the dynamics of the gold call options market. Currently, the open interest in gold call options is about three times the historical average, and after the Federal Reserve's interest rate hike and relatively hawkish press conference, this level of open interest has shown unusual resilience.

Goldman Sachs interprets this phenomenon as: Concerns about the fiscal sustainability of G10 countries continue to support the demand for gold as a macro policy hedging tool.

It is worth noting that Goldman Sachs' target price of $5,400 assumes that the current level of call option open interest remains roughly stable (with about 2.3 million net long call option contracts in GLD), and does not account for the additional price amplification effect that could arise from further increases in call option positions.

Goldman Sachs estimates that at the current level of about 2.3 million contracts, every additional 100 tons of assured demand could lead to a price increase of about 6.8%, while under normal holding conditions, this figure is only about 2%—which means that market makers' hedging behavior could mechanically amplify the upward trend of gold prices, pushing them significantly beyond Goldman Sachs' baseline forecast.

Tail Risk Warning: Extreme Hawkish Path and the "Waiting Room" Effect Before Elections

Goldman Sachs explicitly warns of two scenarios that could trigger a pullback:

1. Downside Risk (Extreme Hawkish Scenario): If the Federal Reserve unexpectedly raises rates three more times before the end of the year and hints at a higher terminal rate, doubts about the independence of developed country central banks may dissipate, leading to a partial liquidation of macro hedging demand.

Combined with net selling from interest rate-sensitive ETF holders, gold prices could temporarily drop to a bottom of about $4,070 per ounce. However, thanks to the continuous gold purchases by central banks raising the price floor, gold prices are expected to gradually recover to about $4,200 per ounce by the end of 2026.

2. Event-Driven Volatility (The "Waiting Room" Effect of the U.S. Midterm Elections): Speculative funds often treat gold as a "waiting room" asset for hedging before major events with uncertain outcomes.

Goldman Sachs points out that before the U.S. midterm elections, speculative positioning could temporarily push gold prices up by about 5% (assuming net managed fund positions are about 250 tons higher than current levels, reaching the 90th percentile since 2014, which is 685 tons). However, once the election results are finalized and funds are redeployed, gold prices may experience severe sell-offs, a phenomenon that has occurred after the 2016 Brexit and the 2024 U.S. presidential election.