Goldman Sachs redefines the gold market: traditional models fail, and the "three major buyers" jointly determine 70% of gold prices

Goldman Sachs Redefines Gold Market Analysis Framework: Traditional Supply-Demand Model Fails, 70% of Gold Price Movements Driven by Fund Flows from "Conviction Buyers" like ETFs and Central Banks, Gold Essentially a "Institutional Credibility Hedging Tool."

On August 19, according to news from the Wind Trading Desk, Goldman Sachs released a summary report on the one-year anniversary of its "Beginner's Guide" to the gold market, fundamentally redefining the analytical framework of the gold market, asserting that the traditional supply-demand model is not applicable to the gold market, and the price drivers come from the fund flows of "conviction buyers."

In the summary report, Goldman Sachs proposed a disruptive analysis of supply and demand with the "Three Conviction Driver Models" (3 Conviction Bucket Model), which primarily tracks the fund flows of three types of "conviction buyers": ETFs, central banks, and speculators, explaining 70% of monthly gold price fluctuations.

Goldman Sachs stated that for every 100 tons of net purchases by "conviction buyers" (ETFs, central banks, speculators), there is a corresponding 1.7% increase in gold prices, while emerging market buyers play the role of "opportunists," providing price support but not determining the trend.

The report also pointed out that unlike consumable commodities like oil, gold is almost never consumed but stored, with approximately 220,000 tons of existing gold almost entirely retained to this day. Goldman Sachs emphasized that gold is essentially an "institutional credibility hedging tool" rather than merely an inflation hedge.

Disrupting the Traditional Supply-Demand Model, "Conviction Buyers" Dominate Price Direction

In the summary report, Goldman Sachs proposed an innovative "Three Conviction Driver Models," categorizing market participants into two types: "conviction buyers" and "opportunistic buyers."

"Conviction buyers" include ETFs, central banks, and speculators, who buy gold based on macroeconomic or risk-hedging judgments, not caring about the price, only whether the strategy is correct. They determine the direction of gold price trends. Opportunistic buyers are mainly households in emerging markets, who are more concerned about whether the price is attractive, only making purchases when gold prices drop to appealing levels (and usually do not sell once they buy).

The core logic of the model: the higher the ratio of net conviction purchases to mine supply, the greater the upward pressure on gold prices. Since mine supply is stable, the changes in net purchases by "conviction buyers" almost explain all monthly price fluctuations.

Therefore, Goldman Sachs discovered through the model that the fund flows of "conviction buyers" explain 70% of monthly gold price changes, with 100 tons of net purchases corresponding to a 1.7% increase in gold prices. Goldman Sachs also noted that opportunistic buyers mainly affect the magnitude of price fluctuations rather than the trend direction.

How to Predict the Behavior of the Three Types of "Conviction Buyers"?

Goldman Sachs elaborated in the report on methods to predict the behavior of various "conviction buyers," summarizing as follows:

Regarding ETFs: Closely related to U.S. policy interest rates, a 25 basis point rate cut brings about 60 tons of ETF demand within six months. ETF holdings change slowly and are sensitive to interest rates, often exceeding levels implied by interest rates during economic recessions or crises.

Regarding Central Banks: Purchases exhibit long-cycle characteristics, increasing gold holdings when the monetary neutrality of reserve assets (concerns about fiscal sustainability) or geopolitical neutrality (risks of sanctions) is questioned After the Russian central bank's reserves were frozen in 2022, emerging market central bank purchases surged fivefold.

On the speculator side: It belongs to "quick money," fluctuating around long-term averages and tending toward mean reversion, seen as "noise" around fundamental value.

Specifically,

1. ETF Demand: Interest Rate Sensitive Western Long-Term Capital

Goldman Sachs data shows that gold ETF holdings are approximately 3,000 tons, with significant interest rate sensitivity and lag. Key characteristics include:

• A 25 basis point rate cut by the Federal Reserve brings about 60 tons of ETF demand within six months;
• ETF fund flows are not forward-looking and only shift after actual rate cuts;
• During economic recessions or market pressures, ETF holdings will persistently and significantly exceed implied interest rate levels.

Goldman Sachs states that the famous "interest rate-gold" relationship mainly stems from the high negative correlation between ETF holdings and interest rates. The "breakdown" of this relationship after 2022 actually reflects a fivefold surge in central bank gold purchases, overwhelming the impact of ETF outflows.

2. Central Bank Gold Purchases: Long Cycle Geopolitical Hedge Tool

Goldman Sachs indicates that central bank gold demand exhibits long cycle characteristics, becoming active when the neutral status of alternative reserve assets is questioned. Historical driving factors include:

Concerns about monetary neutrality: Issues of fiscal sustainability;

Geopolitical risks: Threats of sanctions.

After the 2008 financial crisis, central banks shifted from net sellers to net buyers. Following the freezing of Russia's $300 billion reserves in 2022, emerging market central bank gold purchases surged to nearly 1,000 tons annually, a fivefold increase from previous levels.

Goldman Sachs constructed an "instant prediction model" for central bank gold purchases using UK customs data to capture unreported official buying activities. This model includes: Direct exports of gold bars from the UK to non-Swiss countries (representing direct shipments to central bank vaults); Discrepancies in UK-Swiss trade data (reflecting central bank demand routed through Switzerland).

3. Speculative Positioning: Noise Around Fundamental Value

Goldman Sachs views speculative positions (COMEX net long managed funds) as "quick money," generating fluctuations around fair value anchored by slow-moving funds like ETFs and central banks. Three main patterns:

• Event anticipation positioning: "Waiting room" allocations before significant uncertain events, such as the 2016 Brexit referendum and the 2024 U.S. presidential election;
• News sensitivity: The quick money nature allows for rapid responses to news that alters uncertainty expectations;
• Margin call-driven liquidations: During stock market declines, gold's liquidity makes it a source of funds, causing initial price and position drops.

Gold is a Store of Value, Essentially a Hedge Tool for "Institutional Credibility"

Goldman Sachs emphasizes the fundamental differences between gold and other commodities in the report. Almost all of the approximately 220,000 tons of gold mined historically still exists, with annual new production accounting for only about 1% of the existing stock.

Goldman Sachs believes that, unlike consumable goods like oil, gold is not consumed but stored. Currently, the main constraints on the gold market supply side include:

The labor and energy-intensive characteristics of gold mining result in high fixed costs;

Mines cannot simply "increase production" during a bull market, as capacity is constrained by planning and safety restrictions from years ago;

The globally dispersed mining pattern limits the overall impact of localized disruptions;

The grade of ore continues to decline, with 12 grams of gold extractable per ton of rock in the 1950s, now only 3 grams.

Goldman Sachs states that this structural supply constraint is the fundamental reason for gold's status as a store of value, and this structural characteristic renders traditional supply-demand balance models ineffective in the gold market.

Finally, Goldman Sachs clarifies the misunderstanding of gold as an inflation hedge in the report. Goldman Sachs claims that gold is essentially a hedge against "institutional credibility," rather than a purely "inflation hedge."

Goldman Sachs believes that gold performs exceptionally well during certain specific inflation shocks—those accompanied by a decline in institutional credibility. In other words, when the market begins to doubt whether central banks have the ability or willingness to control inflation, it may lead to hyperinflation, with bonds and stocks plummeting while gold rises.

The 1970s is a typical example: The U.S. engaged in significant fiscal expansion, and the Federal Reserve was forced to accommodate fiscal policy, resulting in runaway inflation. Investors no longer trusted the traditional financial system and turned to "off-system" value-preserving tools—leading to a surge in gold prices.

In a typical inflation cycle in developed markets, the credibility of central banks and long-term inflation expectations usually still exist. Central banks will raise interest rates to curb rising prices, and higher interest rates increase the opportunity cost of holding gold while also reducing investment demand for gold ETFs. In such scenarios, gold's performance typically suffers