Central bank appetite a ‘wildcard’ amid gold’s ‘modest drop’

Yasmine Raso

Senior Journalist

2 July 2026

The latest mid-year analysis from the World Gold Council has recounted a “dramatic rollercoaster ride” for the precious metal given its surge to record highs in January before dropping by around seven per cent year-to-date.

The council said gold’s recent dip below US$4,000 an ounce in late June signalled its sensitivity towards “heightened geopolitical concerns and abrupt shifts in investor sentiment”, but a second half of the year buoyed by “enduring” central bank appetite and policy moves in markets such as India could prove influential “wildcards”.

“This sharp price swing pushed realised volatility to more than 50%,3 alongside a broader rise in cross-asset volatility at the onset of the US–Iran conflict,” the report said.

“Gold’s volatility has since come down below 30%, although it remains above its 20-year average of 17%. Our historical analysis, however, suggests that gold volatility spikes tend to mean revert.

“Despite this recent price pullback, gold is still one of the best-performing assets of the last 12 months, with other assets playing catch-up.

“At a high level, gold responds to the interaction of four main drivers: economic expansion – supports gold jewellery buying, technology demand, and long-term savings; risk and uncertainty – increases demand for gold as a hedge and a portfolio diversifier; opportunity cost – makes gold more attractive as bond yields fall or currencies – especially the US dollar – depreciate, and vice versa; and momentum – captures the impact of short-term investment flows that amplify trends or induce mean reversion after controlling for fundamental drivers.”

While several central banks “tactically” slowed or ceased their 1,000-tonne-per-year stock-up spree in the first quarter of the year, the council’s report suggests that further research stocktaking central bank sentiment confirmed they “will continue to be consistent net buyers this year” and that their appetite will remain elevated over the next year.

“Our analysis suggests that, all else equal, an additional 20t–30t increase in reserves above the long-term average of around 600t per year should translate into approximately a 1% increase in the gold price,” the report said.

“This effect comes not only from the central bank purchases themselves but also from the positive signal it sends to investors. For example, gold tends to exhibit strong returns in periods when the combined contribution from central banks and investment to total demand exceeds 30%.

“A marked deceleration in central bank buying would, of course, create headwinds for gold.”

On the flip side, the council noted that response from India – gold’s second-largest market reporting a net demand of 800 tonne per year – to price movements could have an adverse effect on the precious metal, given that India imports all its gold and its oil supply and energy sector has already taken a hit by the US-Iran conflict.

“The Indian government was forced to intervene to conserve foreign exchange reserves amid mounting pressure on the INR. Since early April, it has adopted a series of measures aimed at moderating gold imports, including a sharp duty increase – from 6% to 15% – and consumer-directed messaging aimed at curtailing gold purchases.

“Our econometric analysis suggests that the country’s import duty increases alone will reduce jewellery, bar and coin demand by 50t–60t (or about 10% y/y).

“We believe the impact from the increased duty should already be reflected in the gold price. But further economic deceleration could impact Indian gold demand through the well-established income effect, deterring Indian consumers and investors from taking advantage of pullbacks to enter the market.

“Furthermore, defaults on collateralised gold loans – which have been gaining traction over the past few years – could increase, thus boosting gold supply.

“Looking ahead, gold is likely to remain rangebound under current expectations but retains clear upside potential if risks intensify or policy expectations shift.

“At the same time, structural support from central banks and long-term investors may help limit downside, reinforcing gold’s role as a strategic and resilient asset in an uncertain global environment.”