The gold price paused its steep rally in October and then retreated, not dramatically, but at least in the first few days, the price drop certainly felt like a small crash. Many investors have since been wondering how far the correction might extend. Some are even convinced that the preceding price increase was a bubble that has now burst.
Shortly before the gold price began its overdue consolidation, the US investment bank Morgan Stanley attracted attention, as none other than its chief portfolio manager announced that it was appropriate to replace the usual rule of allocating portfolios 60 percent to stocks and 40 percent to bonds with a new 60:20:20 rule.
According to this new rule, Morgan Stanley advises its clients to hold 60 percent of their assets in stocks, only 20 percent in bonds, and 20 percent in gold. 20 percent gold is quite a significant figure, especially when the gold is held physically in the form of coins and bars and not as paper gold.
7,465 Tonnes of Gold for Morgan Stanley Alone
While it is not expected that all Morgan Stanley clients will immediately implement the new rule 1:1 in their portfolios, a certain portion of clients is likely to follow the bank’s recommendations. Furthermore, investors who have their assets managed by another bank might also be prompted by Morgan Stanley’s initiative to make changes in their portfolios in favor of a higher gold allocation.
It is therefore expected that the gold allocation in investors’ portfolios will significantly increase in the coming years. What no one currently knows is how quickly and how many investors will follow this suggestion. For simplicity, let us assume that all Morgan Stanley clients will structure their portfolios according to the new rule over the next three years, and clients of all other banks will do nothing.
In this case, only the 4.8 trillion US dollars managed by Morgan Stanley for its clients are affected by the change. According to the new rule, 960 billion US dollars would thus have to be invested in gold. If this gold is purchased at today’s prices, despite the recent price decline, this corresponds to a demand of 240 million ounces. This translates to 7,465 tonnes of gold.
The Impact of Central Bank Gold Purchases is Doubled
Given an annual gold production from mines of approximately 2,700 tonnes and an additional 300 tonnes of recycled gold, 7,465 tonnes of gold is anything but an easily manageable additional demand for the gold market. This holds true even if one assumes that the gold will be purchased gradually over a period of three years.
A look back at the past three years shows what such demand could mean for the gold market. During this period, central banks have massively intensified their gold purchases. Since 2022, they have collectively purchased approximately 3,000 tonnes of gold, and their purchases have significantly contributed to the gold price rising from about 2,000 to over 4,300 US dollars per troy ounce.
Against the backdrop of this historical development and with the knowledge of how much money Morgan Stanley alone manages, every investor can now answer the question for themselves: what will likely happen if, in the next three years, an additional 7,465 tonnes of gold are removed from the market by Morgan Stanley’s clients, on top of the ongoing gold demand from central banks.
The spectrum of possible answers will range between the two extremes: “the gold bubble will burst anyway” and “the gold price will rise even more dramatically than in the last three years.” An additional gold demand, which is more than double that of central banks, should significantly favor the latter answer.
