• As central banks pile up gold reserves, investors are also accumulating the precious metal, JPMorgan reports.

• The bank estimates gold accumulation to be at the highest level since 2012.

• But its uncertain the central bank momentum will last, with buy ups normalizing last quarter.

A fixation among central banks on expanding their gold reserves since 2022 has driven investors to also allocate more of the safe haven asset, JPMorgan said in a note on Thursday.

While the bank has found that global traders have largely been underweight non-gold commodity allocations in the past year, their estimated exposure to the yellow metal has increased to its highest level since 2012.

"In other words, investors' allocation to gold looks rather high by historical standards at the moment and one needs to assume a structural increase in central bank demand beyond historical norms (due to fear of sanctions or general diversification away from G7 government bonds) to be bullish on gold," JPMorgan wrote.

Since Russia's invasion of Ukraine in early 2022, foreign central banks have added to their gold reserves in an effort to be less dependent on the US dollar. Though the world's staple reserve currency, the greenback's weaponization against Russia served as a warning to other countries with large exposures to the US currency.

But while central banks added 228.4 tons of gold in the first quarter — a 176% increase from a year prior — JPMorgan said that continued momentum is uncertain. The note cited a second quarter slowdown, where net purchases normalized at around 100 tons.

However, this could have been due to turmoil in Turkey's local gold market, causing its central bank to increase sales.

Though this normalization trend may only be temporary, it would help restore a more traditional balance between gold price levels and real bond yields. Central bank demand has driven the commodity's price beyond what would be suggested by real 10-year Treasury yields.

JPMorgan added: "While before the pandemic gold ETF flows was the demand component exhibiting the highest correlation with gold prices, and thus the most important flow to watch, after the pandemic it has been central bank flows showing the highest correlation with gold."

A Wednesday report from The World Gold Council cautioned that gold may begin to underperform as long-dated Treasury yields keep climbing, typically an bad sign for gold. It's for this reason that it declined a marginal 1% in August. This also contributed to $3 billion in global gold ETF outflows that month.

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