Investor Allocation to Gold Reaches 11-Year High

According to an analysis by a JPMorgan strategist, investor allocation to gold has reached its highest level in 11 years. The strategist, Nikolaos Panigirtzoglou, and his team of strategists note that this increase in allocation is primarily driven by central bank purchases.

To determine the implied allocation, Panigirtzoglou divided the stock of gold held through coins, bars, or physical gold ETFs by the stock of financial assets. Based on historical standards, the current investor allocation to gold appears rather high. However, Panigirtzoglou suggests that a structural increase in central bank demand beyond historical norms is necessary for a bullish outlook on gold. This increase could be driven by factors such as the fear of sanctions or a general diversification away from G7 government bonds.

While central bank purchases showed signs of normalization in the second quarter, Panigirtzoglou attributes this trend to the turmoil in Turkey. The strategist wonders whether this normalization will persist or if it is merely a temporary situation due to the concentration of purchases in one country. Additionally, Panigirtzoglou raises the question of price sensitivity, speculating on whether central banks will be reluctant to buy more gold than their usual pace with gold prices nearing historical highs.

If central bank purchases do indeed normalize, then gold may once again follow its historical relationship with inflation-adjusted bond yields. Notably, a rise of 100 basis points in the 10-year real yield historically corresponds to a €209 ($224) decline in the price of gold, and vice versa. However, this relationship did not hold true last year.

Panigirtzoglou emphasizes that the pace of central bank purchases will be crucial in determining the future trajectory of gold prices. Meanwhile, front-month gold futures traded at $1,943 an ounce on Thursday, reflecting a 6% increase for the year.