Submitted by Jeff Clark of Casey Research
The Driver for Gold You’re Not Watching
You already know the basic reasons for owning gold – currency
protection, inflation hedge, store of value, calamity insurance – many
of which are becoming clichés even in mainstream articles. Throw in the
supply and demand imbalance, and you’ve got the basic arguments for why
one should hold gold for the foreseeable future.
All of these
factors remain very bullish, in spite of gold’s 450% rise over the past
10 years. No, it’s not too late to buy, especially if you don’t own a
meaningful amount; and yes, I’m convinced the price is headed much
higher, regardless of the corrections we’ll inevitably see. Each of the
aforementioned catalysts will force gold’s price higher and higher in
the years ahead, especially the currency issues.
another driver of the price that escapes many gold watchers and
certainly the mainstream media. And I’m convinced that once this
sleeping giant wakes, it could ignite the gold market like nothing we’ve
The fund management industry handles the bulk of the
world’s wealth. These institutions include insurance companies, hedge
funds, mutual funds, sovereign wealth funds, etc. But the elephant in
the room is pension funds. These are institutions that provide
retirement income, both public and private.
Global pension assets are estimated to be – drum roll, please – $31.1 trillion. No, that is not a misprint. It is more than twice the size of last year’s GDP in the U.S. ($14.7 trillion).
know a few hedge fund managers have invested in gold, like John
Paulson, David Einhorn, Jean-Marie Eveillard. There are close to twenty
mutual funds devoted to gold and precious metals. Lots of gold and
silver bugs have been buying.
So, what about pension funds?
According to estimates by Shayne McGuire in his new book, Hard Money; Taking Gold to a Higher Investment Level,
the typical pension fund holds about 0.15% of its assets in gold. He
estimates another 0.15% is devoted to gold mining stocks, giving us a
total of 0.30% – that is, less than one third of one percent of assets
committed to the gold sector.
Shayne is head of global research at
the Teacher Retirement System of Texas. He bases his estimate on the
fact that commodities represent about 3% of the total assets in the
average pension fund. And of that 3%, about 5% is devoted to gold. It
is, by any account, a negligible portion of a fund’s asset allocation.
here’s the fun part. Let’s say fund managers as a group realize that
bonds, equities, and real estate have become poor or risky investments
and so decide to increase their allocation to the gold market. If they
doubled their exposure to gold and gold stocks – which would still
represent only 0.6% of their total assets – it would amount to $93.3
billion in new purchases.
How much is that? The assets of GLD
total $55.2 billion, so this amount of money is 1.7 times bigger than
the largest gold ETF. SLV, the largest silver ETF, has net assets of
$9.3 billion, a mere one-tenth of that extra allocation.
The market cap of the entire sector of gold stocks (producers only) is about $234 billion. The
gold industry would see a 40% increase in new money to the sector. Its
market cap would double if pension institutions allocated just 1.2% of
their assets to it.
But what if currency issues spiral out of
control? What if bonds wither and die? What if real estate takes ten
years to recover? What if inflation becomes a rabid dog like it has
every other time in history when governments have diluted their currency
to this degree? If these funds allocate just 5% of their assets to gold
– which would amount to $1.5 trillion – it would overwhelm the system and rocket prices skyward.
let’s not forget that this is only one class of institution. Insurance
companies have about $18.7 trillion in assets. Hedge funds manage
approximately $1.7 trillion. Sovereign wealth funds control $3.8
trillion. Then there are mutual funds, ETFs, private equity funds, and
private wealth funds. Throw in millions of retail investors like you and
me and Joe Sixpack and Jiao Sixpack, and we’re looking in the rear view
mirror at $100 trillion.
I don’t know if pension funds will
devote that much money to this sector or not. What I do know is that
sovereign debt risks are far from over, the U.S. dollar and other
currencies will lose considerably more value against gold, interest
rates will most certainly rise in the years ahead, and inflation is just
getting started. These forces are in place and building, and if there’s
a paradigm shift in how these managers view gold, look out!
thought of titling this piece, “Why $5,000 Gold May Be Too Low.” Because
once fund managers enter the gold market in mass, this tiny sector will
light on fire with blazing speed.
My advice is to not just hope
you can jump in once these drivers hit the gas, but to claim your seat
during the relative calm of this month's level prices.