How high must gold rise to be considered high?

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How high does gold need to go before it “runs out of steam”? JPMorgan believes the theoretical limit is $8,400.

Amid major shocks in the metals market, JPMorgan’s commodities analyst Gregory Shearer and his team released their latest research report. While reiterating a year-end target price of $6,300/oz, they have put forward a quantitative framework for judging when gold will peak.

The bank believes that the medium-term framework for gold is rooted in “tonnage demand.” Because short-term gold supply is extremely inelastic, when demand surges, the price of gold must rise in an attempt to restore market equilibrium.

Gregory Shearer wrote:

“If the willingness of investors and central banks to buy (i.e., nominal funds flowing in) doesn’t change, only when the price rises high enough for the same nominal demand impulse to translate into a sufficiently low level of tonnage will the market imbalance driving up prices begin to fade.”

In other words, the mission of rising gold prices is “to make the same money buy less gold,” until physical demand drops to a level that supply can cover. The answer from JPMorgan: “Before investor and central bank appetite weakens, the price may have to reach above $8,000/oz.”

380 tons: The ‘break-even point’ for gold price gains

To turn theory into forecasts, JPMorgan performed a regression analysis on quarterly demand tonnage from central banks and investors alongside changes in gold prices.

Data mining shows that each quarter, only when physical demand from these two sources exceeds 380 tons will the price of gold rise.

This conclusion is highly historically stable—the long-term regression analysis from 2010 onward came to almost the exact same break-even level (around 376 tons).

$8,400: Theoretical Top Under Nominal Demand

From an investor’s perspective, the most straightforward calculation is: How high does gold have to rise for current capital flows to be unable to purchase 380 tons of gold?

JPMorgan’s data indicate that over the past two quarters, nominal demand from investors and central banks averaged slightly above $100 billion. If this nominal capital size remains unchanged, a simple division yields the following conclusion:

“Gold must rise to around $8,400/oz in order for tonnage purchased to drop below 380 tons—which is the historical threshold for sustaining price increases.”

JPMorgan admits this is a limited heuristic model, not accounting for changes in jewelry demand or recycled gold supply. Yet the bank emphasizes the conclusion is clear:

“While as gold prices rise, the ‘air above’ does become increasingly thin, we believe we’re not yet close to the risk that gold’s structural rally will ‘collapse under its own weight.’”

Risk Warning and DisclaimerThe market carries risk, investment requires caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation or needs of any particular user. Users should consider whether any opinions, viewpoints or conclusions presented herein suit their specific circumstances. Any investment made based on this is at your own risk. ```