J.P.Morgan: Geopolitical Risk Premium Finally Cracks But Still Has Room To Further Erode

J.P.Morgan write “while geopolitical risk premium in other assets, including oil, were much quicker to unwind, gold’s risk premium has finally begun to erode in the last week too as the scale of the conflict in the Middle East has remained relatively contained for now.”

• “From a peak of around $175/oz at the end of October, gold’s geopolitical risk premium on top of what can be explained by underlying moves in the USD and US 10-year real yields has more than halved and sits around $65/oz.”
• “While gold prices themselves have retreated, amidst a weaker dollar and a flush lower in US yields month-to-date, a lot of the unwind in risk premium so far has actually come from a convergence higher in an underlying model-implied fair value for gold.”
• “We think current US 10-year real yield levels imply a ‘fair’ gold price level of around ~$1,880/oz, pretty much aligned with what monthly changes in the DXY and real yields also imply.”
• “In the very near-term we expect gold prices could remain under pressure as some of the remaining risk premium continues to erode. Though, we largely expect prices to once again restabilize in the low $1,900s in the coming months, essentially marking time until the final approach towards our expected 3Q24 Fed cut becomes unambiguous, sparking a more sustained resurgence in gold prices.”
• “The near-term risk likely skews towards an over-correction lower in gold. If this were to happen and prices were to fall back towards $1,850/oz, we do think physical market dynamics, like boosted Asian retail demand and continued central bank purchases could once again act as a support.”