Is Gold a Safe Haven in a Turbulent World?

For those weary of the AI debate, this week’s dramatic drop in gold prices has at least shifted the conversation. After gold experienced its biggest single-day drop in over a decade on Tuesday, market debate has centered around whether gold will regroup and push higher.

Goldman Sachs' Bullish Outlook

Goldman Sachs, for example, remains committed to its target of $4,900 per ounce by the end of 2026, believing that demand from central banks and institutional investors will provide strong support for gold prices.

According to analysts Lina Thomas and Daan Struyven, recent ETF inflows and client feedback indicate that many long-term capital allocators, including sovereign wealth funds, central banks, pension funds, private wealth managers, and asset management companies, are planning to increase their gold holdings as a strategic portfolio diversification tool.

JPMorgan's Perspective: Gold as a Treasury Bond Alternative

This aligns with the “Core Today’s View” from JPMorgan’s strategist team led by Nikolaos Panigirtzoglou, who sees gold prices potentially more than doubling over the next three years as more investors use gold as a hedge against equity risks.

Panigirtzoglou and his team believe the recent drop in gold prices was driven by trend-following commodity trading advisors (CTAs) selling gold futures contracts for profit, rather than retail investors exiting gold ETFs. Year-to-date, the spot gold price has surged by over 56%.

They add, “If this assessment is correct, and retail investors were not the drivers of Tuesday’s gold correction, then their buying of gold ETFs is likely driven by factors other than trend-following.”

Gold as a Hedge Against Equity Risks

Strategists suggest that the gold ETF buying frenzy this year cannot be fully explained by the popular “debasement trade” (shifting to gold due to concerns about a weakening dollar).

“The traditional 'debasement trade' does not include a 'hedge against equity risk' motive, but this motive has been particularly evident this year—retail investors simultaneously bought stocks and gold, while shunning long-duration bonds (the asset traditionally used to hedge equity risk),” JPMorgan’s team explains.

The analysts point out that in 2023 and for most of 2024, retail investors flocked to long-duration bonds (likely to hedge against rising stock prices), but they have not repeated this behavior this year despite the continued stock market rally. Instead, gold has become their new choice.

Asset Allocation: Gold vs. Bonds

The strategists estimate that the global non-bank investor gold allocation has risen to 2.6% of total holdings. This figure is calculated by dividing the $6.6 trillion in non-central bank private gold holdings by the total assets of stocks, bonds, cash, and gold held outside the banking system. They state that if the theory of “investors substituting gold for bonds to hedge equity risk” is correct, then the current 2.6% allocation is likely still too low.

Another factor driving investors to shift to gold away from long-duration bonds is the market experience after “Liberation Day”—when US President Trump announced tariffs and then quickly reduced them. According to the JPMorgan team, the stock market experienced a significant pullback at that time, and long-duration bonds also fell simultaneously, rendering the strategy of “hedging equity risk with long-duration bonds” ineffective.

Using ETFs as a reference, the analysts estimate that about 1/10th of a 20% bond allocation is in long-duration bond funds. If this 2% long-duration bond allocation were replaced with gold, the overall gold allocation would rise to 4.6%—implying gold prices would need to nearly double when considering the size of other financial assets.

Future Gold Price Projections

More precisely, Panigirtzoglou’s team assumes that stock price gains over the next three years will be sufficient to raise the equity allocation to 54.6% (the historical peak during the dot-com bubble). Simultaneously, bond and cash holdings are projected to increase by $7 trillion per year over the next three years. Combining these two factors, “for the gold allocation to rise from the current 2.6% to 4.6% by 2028, the gold price needs to rise by 110%.”