Spot gold prices are holding below $US4000 an ounce in New York trading. Despite this, overall market sentiment regarding the precious metal remains optimistic. Bank of America issued a note comparing the current gold rally to previous bull markets, observing that recent gains haven’t been extraordinary, though the metal is currently overbought. They forecast a short-term dip to $US3800 in the December quarter before a significant climb.
The bank projects gold prices potentially reaching $US5000 by 2026. Michael Widmer, a commodity strategist at Bank of America, addressed the apparent contradiction of an overbought yet underinvested market. He noted that central banks continue diversifying their portfolios. Emerging market monetary authorities have allocated 16 per cent of their holdings to gold, still short of the allocation required to maximise the risk-return profile.
Historically, investors have benefited from a 5 per cent gold allocation in traditional 60:40 portfolios. Changes in cross-asset correlations suggest replacing traditional portfolios with 60:20:20 allocations. Analysis indicates this switch would have delivered higher returns since 2020. Current total gold investment relative to equity and fixed income markets hovers around 5 per cent, pointing to continued underinvestment.
Widmer sees nothing unusual in gold’s price swings. Compared to gold bull markets since 1970, the current rally is not out of the ordinary. Monthly price declines of over 10 per cent are not unusual either, with strong rallies often following. ETF buying remains the most volatile investor segment, making it a key indicator of future market direction.
