Deutsche Bank: Gold is Oversold and Underallocated, Environment Will Be Better in 2027

Deutsche Bank Head of Metals Research Daniel Ghali believes that after a recent adjustment, gold is now in an “oversold” position with low investor allocations, and the fact that gold prices have not broken below the July low in a high interest rate and high oil price environment demonstrates that the current market structure is significantly different from 2021 to 2022. He expects that after entering 2027, the allocation environment for gold will be more favorable than it is now.

Ghali stated that while the U.S. 10-year Treasury yield once rose above 5% and crude oil prices remained above $100 per barrel, gold has not set a new low since July. In his view, for a non-yielding asset, this performance reflects the strong resilience gold has shown under conventional macro headwinds.

After a significant slowdown in U.S. employment growth in September, market expectations for a Fed rate hike in October have decreased. CME FedWatch shows that the probability traders assign to a rate hike in October dropped from 64% a week ago to 22%, but the probability for a December hike remains at 87%.

Positioning Near Extreme Levels of Recent Years

Ghali believes that current gold investor positioning is similar to the stagnant phases around 2022, but the underlying demand structure has changed.

According to a summary by Kitco of its interview with him, Ghali said the current gold market positioning may be one of the most bearish since October 2021, with active investors noticeably reducing participation after the weak performance of gold during the Iran war.

Deutsche Bank's previous analysis of capital flows indicated that trend-following funds’ net short positions in gold have reached the highest levels since October 2021, while active investors' long positions have decreased about 55% from the June peak. The open interest of CME gold futures is also at a relatively low level.

However, Ghali pointed out that compared to 2021-2022, official sector gold purchases have more than doubled, while the range of institutional investors participating in the gold market has increased by about 70% compared to 2021. Meanwhile, the scale of reserves available for asset allocation by national reserve management agencies has also increased.

Therefore, Deutsche Bank's focus is not only on reduced speculative holdings, but on the divergence of behavior between two types of capital in the market: active and trend-driven money is reducing their gold positions, while official institutions such as central banks and long-term allocation investors continue to increase their participation.

High US Treasury Yields Reinforce Institutional Diversification Needs

Ghali also believes that rising US Treasury yields do not mean institutional investors necessarily have to choose between bonds and gold.

In the past 20 years, large pension funds, endowments, trusts, and insurance institutions have significantly increased their allocation to alternative assets. However, many so-called alternative assets remain highly sensitive to interest rate changes. When U.S. Treasuries enter a bear market and yields rise sharply, equities, credit, and certain private assets may be impacted simultaneously, thereby weakening the diversification effect among traditional asset classes.

In this environment, some institutions have begun to reassess the role of gold within their overall portfolios. Ghali believes this is also an important factor that differentiates gold’s current demand structure from the previous high-interest-rate cycle.

Similar changes have previously appeared in large pension funds. According to a Bloomberg report in September, large institutions such as the New York City Retirement System and the Los Angeles County Employees Retirement Association are recalculating shared risks across AI and other cross-asset segments within their portfolios, as correlation among stocks, private equity, corporate bonds, and infrastructure has increased.

Gold, however, does not share risk factors like corporate profitability, credit spreads, or cash flow duration, so the rationale for institutions to allocate gold is gradually expanding from a pure inflation trade to broader portfolio diversification.

Short-term Still Influenced by Oil Prices and Fed Path

Deutsche Bank's assessment does not mean that gold has become immune to interest rate environment influences.

In the past month, rising energy prices have pushed up inflation expectations and briefly drove US long-term Treasury yields to multi-year highs, which is an important reason for gold’s marked decline in September. The geopolitical risks brought by the Iran war have on one hand increased safe-haven demand but on the other, created opposing impacts via oil prices, inflation, and interest rates.

Reuters reported on Monday that after a weaker-than-expected US September jobs report, gold rebounded somewhat. The market still believes the Fed's rate hike cycle is not over, and another policy tightening in December is still being priced in with a high probability.

The Middle East situation continues to affect gold’s macro environment. On Sunday, Yemen’s Saudi-backed government announced a large-scale military operation against Houthi-controlled areas, so regional conflicts may still influence inflation expectations and bond yields through oil prices.

Ghali believes that gold’s weaker-than-expected performance during the Iran war is a key reason why active funds remain cautious at present. However, from three dimensions—low positioning, official sector purchases, and broader institutional participation—Deutsche Bank believes the current gold market is now clearly distinct from the low positioning period of 2021-2022.