Gold Price Holds Near Record Highs: Central Bank Buying vs. Rate Cut Expectations

International gold prices continue to fluctuate near historical highs, with market sentiment swinging between central bank buying sprees and expectations of Federal Reserve rate cuts. The latest data from the World Gold Council shows that global central banks have maintained high net gold purchases for multiple consecutive quarters, while U.S. inflation data and labor market resilience have repeatedly delayed the timing of rate cuts. Amidst intertwined bullish and bearish narratives, volatility in the gold derivatives market has risen significantly, with implied volatility of options at elevated levels.

Central Bank Buying: A Structural Support

According to a report by the World Gold Council, global central bank gold reserves increased by over 1,000 tonnes in 2024, marking the third consecutive year above the thousand-tonne mark. Key buyers included the People's Bank of China, the National Bank of Poland, and the Monetary Authority of Singapore. This trend has not weakened in 2025, with the latest data showing that central bank gold purchases in the first quarter of this year maintained positive year-on-year growth.

The rationale behind central bank buying has shifted from traditional safe-haven demand to diversified asset allocation. Against the backdrop of heightened geopolitical risks and challenges to the credibility of the U.S. dollar system, gold's value as a reserve asset without sovereign credit risk is being reassessed. Analysts at Goldman Sachs noted in a recent report that central bank buying is a key support for gold prices at the bottom, and they expect this structural demand to persist for years.

Rate Cut Expectations: The Core Driver of Short-Term Volatility

Unlike the long-term logic of central bank buying, the Fed's monetary policy path is the core factor influencing short-term gold price fluctuations. According to the Fed's latest dot plot, two rate cuts of 25 basis points each are expected in 2025, but the market remains skeptical. U.S. inflation data rebounded in early 2025, with core PCE price index year-on-year growth still above the 2% target, while the labor market remains resilient, with non-farm payrolls consistently exceeding expectations.

This combination of "sticky inflation and strong employment" has repeatedly postponed rate cut expectations. The CME FedWatch tool shows that the market's probability of a June rate cut has at times fallen below 50%, while the probability of a September cut is relatively higher. Every economic data release triggers sharp fluctuations in the gold derivatives market, with significant changes in COMEX gold futures open interest.

The Battle Between Bullish and Bearish Narratives

The current gold market presents a typical pattern of "intertwined bullish and bearish factors." The bullish case is primarily based on: long-term support from central bank buying, global geopolitical uncertainty, and the weakening of the U.S. dollar's credibility due to expanding fiscal deficits. Data from the World Gold Council shows that global gold ETF holdings rebounded at the end of 2024, ending three consecutive years of net outflows.

The bearish case focuses on: high interest rates increasing the opportunity cost of holding gold, a strong U.S. dollar index, and the possibility that persistently high inflation could force the Fed to tighten policy again. Some analysts argue that gold prices have partially priced in rate cut expectations, and if the timing of cuts is further delayed, gold prices could face a correction.

Derivatives Market: Rising Volatility Trading

Against the backdrop of unclear direction, the gold derivatives market exhibits two major characteristics: first, implied volatility of options remains high, especially for short-term options; second, the positioning ratio of call options to put options has diverged. According to data from the Chicago Mercantile Exchange, the average daily trading volume of gold futures options has increased by about 20% year-on-year, with out-of-the-money options trading particularly active.

Traders tend to use straddle or strangle strategies to capture breakout moves, while using calendar spreads to hedge against risks from changes in rate cut expectations. One options trader noted that the market is highly sensitive to any news, and a surprise inflation data point can trigger a gold price move of more than 2%.

Outlook: Key Variables to Watch

Looking ahead, the direction of gold prices will depend on several key variables: first, the actual pace and magnitude of Fed rate cuts; second, whether central bank gold purchases can maintain current levels; and third, whether geopolitical risks escalate further. From a technical perspective, gold prices are forming a consolidation range near historical highs, and the direction of the breakout will determine the medium-term trend.

Most institutions believe that with the support of central bank buying, the downside for gold prices is relatively limited, but short-term volatility may increase. For derivatives investors, controlling position sizes and flexibly using options strategies may be the best approach to navigate the current complex situation.