Structural Shifts in Central Bank Demand Are Redefining Gold’s Support Levels

According to Société Générale, the time has come to view gold optimistically again, as they observe a gradual recovery after months of correction. In a recent market assessment, analysts stated the precious metal looks attractive again, despite trimming their gold positions in the first half of the year. Gold recently rebounded to around $2,450 after sharp corrections triggered by US-Israel-Iran conflicts and rising expectations of Federal Reserve rate hikes.

Meanwhile, volatility has normalized, speculative positions have recovered above their two-year average, and the put/call ratio for gold options fell to a six-month low, signaling renewed bullish sentiment. Although gold continues to face headwinds from higher interest rates and a strengthening US dollar, Société Générale believes much of the Fed’s tightening has already been absorbed by financial markets, creating a more favorable risk-reward ratio for gold.

The French bank remains “strategically optimistic” about gold, viewing it as a key hedge against monetary and political uncertainty. A clear regime shift has occurred since 2022. Despite persistently positive real yields, gold trades near record highs, deviating from historical patterns that would imply much lower prices. Structural factors like sustained central bank purchases, de-dollarization trends, geopolitical uncertainty, and sovereign debt worries appear to provide a higher support level for gold prices, limiting the negative impact of elevated real rates.

Analysts noted that since mid-2023, markets shifted from expecting further monetary easing to debating whether the Fed will raise rates once or twice more. This pushed two-year Treasury yields above 4% and supported the dollar. However, despite these traditional headwinds, gold remains significantly above mid-2023 levels. In their view, another substantial rate hike would require a much stronger inflation shock and more aggressive Fed response.

Since much of the tightening is already priced in, downside risk for gold seems increasingly limited. Société Générale expects rates to stay unchanged until 2027 under their base scenario, though they acknowledge persistent inflation could force a single rate hike this year. They consider sustained inflation another reason for strategic gold investments. A new wave of US tariffs, AI and infrastructure investments, energy price volatility, and large budget deficits create a more inflationary environment than markets currently anticipate. Alongside improved macro conditions, the underlying demand profile for gold continues to provide crucial support.

China steadily increases its gold reserves, while emerging market central banks structurally diversify away from traditional reserve assets. As speculative demand wanes and public sector purchases remain active, central banks are becoming a key anchor for the gold market. Lower volatility historically signals a buying opportunity, and sustained central bank demand should ensure stable price levels.