Here's Why JPMorgan Expects The Gold Surge To Continue

Helped by a sharply weaker dollar in the past month, and a collapse in real 10Y yields to all time negative lows of -0.93%...

... the price of gold made a new all time closing high surpassing $1900 on Friday with the December contract (where the most open futures interest can now be found) hitting an all time high, and gold has already jumped out of the gate with futures reopening on Sunday...

... with silver similarly spiking.

According to JPMorgan's Nikolas Panigirtzoglou, retail investors appear to have been mostly behind the recent rally (although the Robinhood army has yet to fully engage), and indeed the buying of physical gold ETFs, a major vehicle used by retail investors, rose steeply in recent weeks, making this year already the strongest on record with still five months remaining. This is shown in the chart below which shows the annual flow into physical gold ETF in metric tonnes.

As a result of this year's inflow, the stock of gold in ETFs has reached a record high of close to 110 million ounce far higher than its previous high seen in 2012.

This also means that retail investors are becoming more overweight gold and are approaching the 2012 highs. This in turn is shown in the next chart which shows the ratio of the outstanding amount of gold ETFs in dollar terms divided by the dollar value of equity and bond funds worldwide.

This ratio, which can be considered as proxy for the gold allocation of retail investors, is only .03% away from its peak of 0.5% seen in 2012. It remains to be seen whether this previous high gold allocation of 2012 will be breached or not in the current conjuncture. At the moment the chart above implies further room for the gold rally to continue.

Retail investors aside, what about tactical institutional investors such as hedge funds? To gauge the exposure of speculative institutional investors such as hedge funds, JPMorgan looks at the spec position on gold futures reported by CFTC every week. This is shown in the final chart which shows that the spec position in gold futures is some way from its Feb peak, also leaving quite a bit of room for further rally.

JPMorgan's conclusion: "In all, whether we look at retail investors’ gold allocations or the spec positions on gold futures by hedge funds, we see further room for the gold rally to continue."  And judging by the spike in precious metals in Sunday's premarket, traders agree.