New tool for stock hedging! JPMorgan: If gold allocation rises to 4.6%, the gold price could double.

A potential transformation in asset allocation is quietly taking place, with gold possibly replacing bonds as the new favorite in hedging portfolios.

According to news from Wind Chasing Trading Desk, a latest report from JPMorgan dated October 22 shows that gold is likely acting as a structural supplement, partially replacing long-duration bonds to become a popular choice for hedging equity risk. The report believes that if this structural shift becomes reality and continues, it could drive gold prices to more than double in the next few years.

The team led by strategist Nikolaos Panigirtzoglou pointed out, that if global non-bank private investors increase the proportion of gold in their financial assets from the current 2.6% to 4.6%, gold prices may need to rise by 110% from current levels by 2028 to satisfy this demand.

The background of this bold prediction is that although gold prices experienced a rapid correction of more than 7% between October 21 and 22, there was no panic selling in the market.

Analysts believe that the recent drop was more likely caused by momentum traders such as Commodity Trading Advisors (CTAs) taking profits after futures positions in gold reached extremely high levels. The key observation is that there was no significant capital outflow from physical gold ETFs held by retail investors on October 21, indicating that their confidence in long-term holdings remains strong.

This phenomenon reveals a key dynamic in the current market: investors, especially retail investors, are buying both stocks and gold while avoiding long-duration bonds, which have traditionally been used to hedge stock market risk.

Investor Shift: Gold Replaces Bonds as the New Favorite

According to JPMorgan observations, a notable feature of investor behavior this year is the simultaneous increase in holdings of both stocks and gold. This is in stark contrast to their approach in most of 2023 and 2024, when they poured into long-duration bonds to hedge against rising stock market risk.

Although gold has retreated recently, its price is still up 54% so far this year. The holdings of physical gold ETFs (measured in troy ounces) have grown by 19% over the same period, indicating strong investor demand.

The report analyzes that behind this shift is rising investor doubt about the effectiveness of bond hedges. In particular, after the shocks of the “Tariff Liberation Day,” where both the stock market and long-term bonds plunged, risk-parity strategies relying on bond duration to hedge stock risk took a heavy hit. This has prompted investors to seek new alternatives.

The report points out that while part of the motivation for buying gold may relate to “currency devaluation” concerns triggered by factors such as geopolitics, inflation outlook, and large government deficits, the more fundamental driver is the search for a hedge against equity exposure.

Data shows that currently the global non-bank investment community (including retail investors and family offices, etc.) has up to 48% of their financial assets allocated to equities, while gold accounts for only 2.6% (about $6.6 trillion).

Targeting 4.6% Allocation and the Prospect of Doubling Prices

JPMorgan analysts pose a key question: With global non-bank investors allocating up to 48% to equities, is a 2.6% allocation to gold sufficient to provide effective hedging? The report suggests “probably not.”

The bank calculated specifically: Of the current 20% allocation to bonds by investors, around one-tenth (i.e., 2% of total assets) is invested in long-duration bond funds with duration over seven years. If investors decide to fully replace this portion, which has volatility similar to gold, with gold, the total gold allocation would mechanically rise from 2.6% to 4.6%. The report writes:

More precisely, if we further assume stock prices continue to rise over the next three years, and bond and cash assets expand by about $7 trillion annually, then by 2028, gold prices would need to rise by 110% to reach the 4.6% allocation target.

Therefore, it should be clear that the report's prediction of a doubling in gold prices is based on this core assumption of a major shift in asset allocation behavior by investors, and is not a definitive forecast.

Not a Repeat of the 1970s “Currency Devaluation” Trade

To validate the uniqueness of the current trend, JPMorgan compared it with the gold boom of the 1970s and 1980s. The report believes there are fundamental differences.

In the 1970s, investors bought gold mainly out of fear of “currency devaluation.” Data shows that after the Federal Reserve under Paul Volcker dramatically tightened monetary policy to control inflation, gold allocations dropped sharply after 1980 and did not rebound as the stock market rallied continuously from 1982 onward. This indicates gold was not used as a hedge for equities at the time.

In addition, based on US Geological Survey (USGS) data, the report estimates that even at the peak in the late 1970s, gold allocations by US non-bank investors were “significantly lower than current levels.” This further reinforces JPMorgan’s view that the current logic of considering gold as a structural hedge for stocks is a novel phenomenon and potential that differs from history.

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