What Does the 'Niche Market' of Gold Mean?

The allocation of gold in U.S. investment portfolios remains low, yet it is highly sensitive to incremental funds.

Written by: Bu Shuqing, Wall Street Journal

The gold market is vast, yet it remains a 'niche asset' in Western investors' portfolios—this characteristic is fundamentally why gold prices are highly sensitive to capital inflows.

Goldman's analysis shows that in December last year, gold ETFs accounted for only 0.17% of U.S. private financial portfolios, down from peak levels in 2012. Goldman estimates that for every 0.01 percentage point increase in gold's share of U.S. portfolios, gold prices will rise by about 1.4%. This means that even a very modest inflow of funds can significantly boost gold prices.

Currently, gold is experiencing one of the largest monthly increases in history. JPMorgan's projections for May 2025 further confirm the market's high sensitivity—if foreign investors were to shift 0.5% of their U.S. asset holdings into gold, it would amount to approximately $70 billion annually, which under current market conditions could drive gold prices up by about 18% each year.

Limited Real Liquidity Under Massive Volume

Measured by total volume, gold is one of the largest asset classes globally.

It is estimated that the above-ground stock of gold is worth over $30 trillion, and the weekly trading volume in the London spot market exceeded $1 trillion earlier this year. The global average daily turnover in gold easily surpasses $300 billion.

However, this astonishing trading volume is largely an illusion.

Bloomberg reports that the majority of this trading volume consists of high-frequency transactions between banks, market makers, algorithmic funds, and forex traders, rather than new investment funds competing for physical metal.

This structural characteristic determines that the gold market is actually difficult to absorb large-scale capital transfers from bond investors without triggering a significant price increase. For those investors seeking refuge due to concerns over U.S. debt issues, the 'capacity bottleneck' in the gold market becomes an intrinsic driver of price increases.

The 'Currency Depreciation Trade' Continues to Heat Up

The core logic supporting current gold prices is the market's ongoing focus on the long-term borrowing costs in the U.S. The so-called 'currency depreciation trade' refers to investors betting that policymakers will alleviate debt pressures by lowering interest rates and eroding the dollar's purchasing power, thereby buying gold as a hedge.

Bloomberg reports that if efforts to curb long-term borrowing costs in the U.S. continue to advance, this trading logic will be further reinforced.

This Friday, Federal Reserve Chairman Waller will speak in Jackson Hole, Wyoming, and the market will closely monitor his statements. If Waller signals that fiscal pressures are beginning to transmit to monetary policy, it will further enhance gold's appeal and inject new catalysts into the 'currency depreciation trade.'

Sustainability Depends on Investor Attention

Whether gold can maintain its current upward trend largely depends on whether investors continue to focus on U.S. government debt issues rather than shifting their attention to the Iran conflict or the burgeoning artificial intelligence investment craze.

Structurally, gold's share in Western investors' portfolios remains relatively low—especially after years of strong gains in the U.S. stock market, gold's relative attractiveness has been suppressed for a long time. This underweight status is both the root of gold's high sensitivity to incremental funds and indicates that once investor sentiment shifts, the potential for upward movement remains considerable.

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