Investment Strategy

Is it a golden era for gold?

Executive summary

The price of gold is often driven by a complex interplay of factors, including the U.S. dollar exchange rate, real yields, supply/demand dynamics and sentiment. In recent years gold has exhibited a tendency to react to real yields in an asymmetric manner, supported by strong central bank purchases.
We are constructive on gold given peaked real yields, elevated concerns over fiscal sustainability, potentially underpriced geopolitical uncertainties. These translate into continued central bank demand and more retail participation.
For long term investors, gold merits a position in a diversified portfolio, potentially serving as short-term buffer against risk events, a reliable longer-term store of value, and most importantly as a portfolio risk diversifier.

Gold has been a sought-after commodity for centuries, and a popular component in investment portfolios in modern times. The metal has historically delivered attractive long-term returns, appreciating ~12% on an annual basis over the past 20 years. That said, its price has exhibited significant volatility – with prices tumbling around 40% from 2011 to 2015, before it fully recovered in 2020. Since late 2023, the metal has experienced a strong rally, consistently reaching new all-time highs. 2025 has been a record year for precious metals. At the time of writing, gold has delivered an eye-dropping 60% year-to-date, outperforming any major equity benchmarks.

As in the previous editions of this article (published in February 2024 and January 2025 respectively), our view on gold remains firmly bullish into 2026. Our latest outlook is that gold will likely reach $5,200 - $5,300/oz by the end of year. The price of gold is influenced by a complex interplay of macro factors as well as supply/demand dynamics. Understanding its unique characteristics and benefits is crucial for investors who look to establish portfolios that endure through cycles. This article aims to identify and analyze the key drivers of gold prices, how they evolved in recent years, and how an appropriately sized gold investment can add value to a portfolio from an asset allocation perspective.

What drives gold prices?

1. The level of the U.S. dollar

Historically, gold prices have often exhibited a negative correlation with the value of the U.S. dollar, as gold is denominated in dollars. When the USD weakens, gold becomes relatively attractive for holders of other currencies, thereby increasing demand. Conversely, gold prices tend to weaken as the dollar strengthens. However, there are instances when this relationship does not hold. For example, in 2012-13, gold lost 18% of its value even though the USD remained relatively stable, rising less than 1%.

Looking ahead, we think the dollar environment remains largely benign for gold prices. Following a year of significant weakness, the dollar is entering a bumpy process of bottoming into 2026. While we don’t expect much further weakness in the dollar, the next 6-12 months is also not an environment for USD strength. In our base case, the cyclical recovery in the U.S. economy over 2H will be gradual, along with synchronized improvement in other major economies i.e. Europe and Japan. Lingering concerns over Fed independence and U.S. fiscal sustainability may limit how strong the dollar can get. Overall, this outlook suggests a relatively stable environment for gold prices into 2026.

The u.s. dollar environment is largely benign; we expect the dollar to stabilize, tracking the moves In interest rate differential

DXY model based on 5Y swap rate differentials

Indices are not investment products and may not be considered for investment.
Sources: J.P. Morgan Private Bank, Bloomberg Financial L.P., Data as of January 9, 2026.

2. Change in real yields

Historically, gold prices have demonstrated periods of an inverse relationship with real yields (i.e. inflation adjusted interest rates). As gold itself does not generate interest income, real yields can be seen as the opportunity cost of holding it. When real yields go down, gold becomes more attractive relative to interest bearing assets such as cash and fixed income securities. This inverse relationship explains a large part of the price increase in gold since the 1990s, as real yields progressed lower, down a path of structural decline. Large gold rallies such as those from 2008-2012 and 2019-2021 can also be attributed to real yields falling into negative territory, as global quantitative easing and zero interest rate policies severely depressed yields.

Traditional inverse correlation before 2022

Gold prices vs 10-year U.S. real yields 1997-2021

Sources: Bloomberg Financial L.P., Data as of December 31, 2021.

However, over the past two years there has been a notable divergence between movements of gold prices and real interest rates. In early 2022, the Federal Reserve embarked on an aggressive tightening cycle at an unprecedented pace, under the backdrop of stubbornly elevated inflation and exacerbated global supply disruptions following the outbreak of the Russia-Ukraine war. Real yields rose aggressively from deeply negative territory to the highest levels seen since the Global Financial Crisis of 2008. 10-year U.S. real yields rose by a historic 250bps over the course of 2022, followed by another 20bps rise in 2023. In this environment gold prices remained very resilient. Prices were mostly unchanged in 2022, although with significant volatility, and in 2023 posted a +13% return, ending the year at a record high of $2,068/oz.

Has the correlation permanently broken? We believe it has temporarily shifted and will likely reestablish itself at some point. We find that for now, gold still reacts to the movements in real yields, only in an asymmetric manner – it declines less when rates go up and rises more when rates move down. Why? The answer to that is largely related to a recent shift in supply and demand dynamics.

Since 2022, gold prices stayed incredibly resilient despite much higher real yields

Gold prices vs. 10-year U.S. real rate

Source: Bloomberg Finance L.P. Data as of January 13, 2026.

3. Supply and demand dynamics

All commodities, at their core, are driven by supply and demand. The price of gold is affected by other drivers, as discussed above, but supply and demand are a key factor. Global mining of gold has been fairly stable for many years, and so the demand profile is particularly important and unique. This sets it apart from other commodities. There are several key sources of demand for gold, which can be categorized into three groups: industrial, investment and reserve management.

Industrial demand

Jewelry fabrication. Jewelry demand accounts for around 50% of total annual gold consumption. As a beauty, permanence and status symbol, gold is highly coveted with demand particularly strong in Asia, especially from India and China.
Technology. Around 10% of gold demand comes from industrial and technology uses, in industries including electronics, dentistry, aerospace and others.

Investment and Reserve Management

While investment and reserve management demand accounts for a smaller portion of total gold consumption, they can periodically be a more significant driver of gold prices. The impact of reserve managers or Central Banks has been more evident in recent years.

• Central banks

Central banks have been significant buyers of gold for decades. In the 19th Century most countries fixed the value of their currencies to gold, and this became known as the Gold Standard. Central banks were required to hold sufficient gold reserves to back their currencies and allow convertibility of currency into gold. This system was highly disciplined, but proved to be unworkable during times of crisis. Eventually governments found the need to expand monetary supply beyond the restrictions of the gold standard, and the system was abandoned after the Second World War to be replaced with the Bretton Woods System. This system fixed the dollar to gold at a set price and fixed international currencies to the dollar. Unsurprisingly this too proved to be unworkable, and as the United States began to run large deficits, strains began to emerge. Eventually the U.S. fully abandoned the link to gold in 1971, leading to the collapse of Bretton Woods. This allowed the price of gold to float freely on international markets.

Although the need to hold gold as a reserve asset was now removed, the scarcity of gold inherently made it appealing to Central Banks as a store of value. This role has waxed and waned over the years, but as can be seen in the chart below – over the past 20 years, central banks worldwide now keep around 20% of their Foreign Exchange reserves in gold. That said, there is a significant variance between Developed Market (DM) and Emerging Market (EM) central banks regarding gold allocations, with emerging market holding much lower than their DM peers.

Central banks hold ~20% of FX reserves in gold

Composition of total central bank foreign exchange reserves

Sources: IMF, World Gold Council, J.P. Morgan Private Bank. Data as of 4Q2024. Data across 123 central banks that report data to the IMF.

EM central banks may catch up on gold allocations

Gold reserves as a % of total central bank reserves

Sources: J.P. Morgan Investment Bank, World Gold Council. Data as of 3Q 2025.

After a long hiatus, central bank purchases have risen notably in recent years. According to statistics compiled by the World Gold Council, net purchases by central banks around the world reached a record 1,082 tonnes in 2022, more than doubling the average annual purchase over the previous 10 years. This strong purchase momentum continued in 2023 and 2024, maintaining a breakneck pace of above 1,000 tonnes. The first three quarters of 2025 saw purchases of 632 tonnes, only modestly slower than previous years despite the sharp price rally. Demand remained broad-based and driven by emerging market central banks. This is now acknowledged to be a main driver of gold price resilience during the recent rise in real yields.

The outlook of central bank purchase remains strong into 2026, as a record of 43% of 73 global monetary authorities believe their own gold reserves will increase over the next year, as suggested by a recent World Gold Council survey (see chart below). There are various reasons for central bank increases in the accumulation of gold. However, it has become apparent that countries facing elevated geopolitical risks i.e. those on the borders of the Russia-Ukraine war, are increasing their gold reserves. In some cases, nations that are not allied with the United States have begun to look to reduce their reserve mix away from dollars, as they perceive the risks of keeping these reserves vulnerable to sanctions. Other governments aim to add some protection against higher and more volatile inflation worldwide, as the developed world exits the era of ultra-low inflation post-GFC. The scarcity of gold sometimes allows it to play a role as an inflation hedge, although this is often transitory.

Central bank demand has doubled since 2022

Global central bank net purchases/sales, metric tonnes

Sources: World Gold Council, Bloomberg Finance L.P., J.P. Morgan. Data as of September 30, 2025.

How relevant are the following factors in your organizations decision to hold gold?

Relevancy %

Source: World Gold Council, data as of June 2025. The survey includes 59 central banks, with 13 from advanced economies and 46 from emerging/developing economies.

The chart titled "How relevant are the following factors in your organizations decision to hold gold?" presents the percentage relevancy of various factors influencing central banks' decisions to hold gold, as of June 2025. The data is shown as horizontal stacked bars, with each factor broken down into four categories: Highly relevant (dark blue), Somewhat relevant (light blue), Marginally relevant (orange), and Not relevant (brown). Factors and their relevancy breakdowns: Performance during times of crisis: 44% highly relevant, 41% somewhat relevant, 8% marginally relevant, 7% not relevant. Effective portfolio diversifier: 39% highly relevant, 42% somewhat relevant, 10% marginally relevant, 8% not relevant. Long-term store of value/inflation hedge: 36% highly relevant, 44% somewhat relevant, 14% marginally relevant, 7% not relevant. Historical position: 57% highly relevant, 17% somewhat relevant, 14% marginally relevant, 12% not relevant. No default risk: 46% highly relevant, 25% somewhat relevant, 24% marginally relevant, 5% not relevant. Serves as a geopolitical diversifier: 34% highly relevant, 37% somewhat relevant, 14% marginally relevant, 15% not relevant. Part of reserves diversification policy: 37% highly relevant, 32% somewhat relevant, 15% marginally relevant, 15% not relevant. Highly liquid asset: 27% highly relevant, 25% somewhat relevant, 37% marginally relevant, 10% not relevant. Lack of political risk: 10% highly relevant, 39% somewhat relevant, 20% marginally relevant, 31% not relevant. Concerns about systemic financial risks: 15% highly relevant, 31% somewhat relevant, 39% marginally relevant, 15% not relevant. Serves as valuable collateral: 22% highly relevant, 20% somewhat relevant, 25% marginally relevant, 32% not relevant. Domestic gold production: 24% highly relevant, 8% somewhat relevant, 7% marginally relevant, 61% not relevant. Other central banks hold gold: 12% highly relevant, 19% somewhat relevant, 32% marginally relevant, 37% not relevant. Anticipation of changes in the international monetary system: 14% highly relevant, 31% somewhat relevant, 6% marginally relevant, 49% not relevant. Policy tool: 8% highly relevant, 12% somewhat relevant, 20% marginally relevant, 59% not relevant. Domestic citizens’ perceptions about gold: 10% highly relevant, 8% somewhat relevant, 24% marginally relevant, 58% not relevant. Concerns about sanctions: 7% highly relevant, 10% somewhat relevant, 19% marginally relevant, 64% not relevant.

Retail and institutional investors

Many investors hold positions in gold as part of an investment portfolio. These investments can be made via exchange-traded funds (ETFs), futures markets, options, or structured notes. Many investors prefer to hold the physical metal – and invest in bars, coins and claims linked to individually-numbered bars.

Holdings of gold ETFs have become more popular with retail investors since their inception in 2004 and hit a record in 2020 when the Covid pandemic caused worldwide lockdowns. Since then, holdings have been on a gradual decline, and now are back to pre-pandemic levels. Retail ETF flows in gold are often seen to be driven by fears of inflation, conflict or crisis, and the relative level of interest rates. These investors tend to be short term, but can be effective drivers of price. Institutional investors are more long term and often hold the metal physically. Pension funds and Foundations, in particular, tend to hold the metal for decades. Hedge Funds and Commodity Trading Advisers are more speculative in their approach, but can have prolonged impacts to price movements.

ETF demand has been a main driver for the sharp rally in 2025 and is poised to continue driving prices higher into 2026. Following a protracted decline from the 2021 peak through 2024, ETF holdings reversed course around mid-2024 and accelerated markedly in 2025 (see chart below). This trend has exhibited a clear inverse correlation with movements in cash rates. Retail investors typically shift into cash when the Fed maintains elevated rates; conversely, as the Fed reduces interest rates and cash yields decline, investors reallocate from cash into fixed income or alternative strategies, including gold. This dynamic effectively explains why holdings reached a trough in 2024—at that juncture, the market began to price in imminent rate cuts from the Fed, prompting a decline in cash returns and a subsequent rotation into other asset classes.

Retail participation in gold ETFS has increased since mid-2024

Total known gold ETF holdings, millions $

Sources: Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of December 2025.

Our outlook on gold

We maintain a bullish outlook on gold over the next 12 months, underpinned by robust demand dynamics. Central bank purchases remain broad-based and are expected to persist, with emerging market central banks continuing to increase allocations. Despite significant accumulation over the past three years, these institutions remain under-allocated to gold relative to their developed market peers. Additionally, we anticipate further inflows from retail investors, driven by declining cash rates. As returns on cash investments diminish, retail investors are likely to rebalance portfolios in favor of gold.

Over the longer term, the debasement trade is expected to provide sustained support for gold allocations, reflecting ongoing concerns regarding fiscal discipline globally. In last year’s update, published after the U.S. election, we expected strong gold performance under a Trump administration, citing two key factors: persistent concerns over the U.S. deficit amid expansionary fiscal policy, and a potential increase in USD reserve diversification in response to trade tensions and heightened geopolitical risks. These drivers remain relevant for the coming year. Our current outlook estimates gold prices to reach $5,200 to $5,300 by year-end.

Gold in a portfolio

In our view, the most compelling rationale for owning gold is its role as a portfolio diversifier. This was clearly demonstrated in 2022, when global equity markets declined by -19.46%, global bonds fell by -16%, yet gold appreciated by 3%¹,. The diversification benefits are further underscored by modern portfolio theory, which posits that allocating across lowly correlated assets may help enhance overall risk-adjusted returns.. Historically, gold has maintained a low, and at times negative, correlation with traditional asset classes such as equities and bonds. Incorporating gold into asset allocation may serve as an effective portfolio ballast, strengthening the risk-return profile.

You should consider an allocation of approximately 5% to gold within a diversified portfolio. According to JPMorgan Asset Management’s Long Term Capital Market Assumptions (LTCMAs), gold most effectively enhances the risk-return characteristics of a balanced portfolio when the allocation ranges between 3–7%.

Data is as of December 23, 2025.

KEY RISKS

Index definitions

The U.S. Dollar Index (DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" (value) when compared to other currencies.

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All market and economic data as of 21 January, 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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