Guest Post: The Driver For Gold You’re Not Watching

Tyler Durden's picture

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.

But there’s
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
ever seen.

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).

We
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.

Now
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. 

And
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!

I
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.

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jkruffin's picture

Here is the ultimate, and only, clue you need to see to get out of the scam that is Bernanke's stock market.

 

http://finance.yahoo.com/news/2-years-after-market-low-the-apf-249207562...

 

Anyone who doesn't see this as the sign to bail if you are long, you really need your head examined!

The They's picture

all the pension funds have bought into this phony stock/bond market and will be the ones holding the bag when the shit hits the fan.  Only then will they realize that they should have bought gold but by then they'll have lost all their money and thus be irrelivant (ok maybe this is a slight exageration).

NewThor's picture

Pension funds get kick backs to buy crappy stocks and bonds in bulk.

If you want to find corruption, just look for something that is supposed to be regulated by 

the Government. 

 

Bringin It's picture

Of course - OPM - Other People's Money.

Dr. Porkchop's picture

It's bad in Canada. We have high management fees for mutual funds. People are piling into ETFs because they have lower fees, but I wonder if people know what they're getting into. I'm buying physical metals, 100% management fee to the fund manager...me.

Oh regional Indian's picture

OT, this might be very pertinent and worth a look and share.

The Axis of Evil Doing

http://aadivaahan.wordpress.com/2011/03/09/axis-of-evil-doing/

Appreciate comments etc. Tylers?

Thanks.

ORI

 

 

traderjoe's picture

Pension funds are run by professional money managers (aka parasites). They won't be left holding any bag. The pensioners will be, but that is a whole different matter. The creation of pension funds (trapping the savings/excess labor of workers) was a 'genius' creation of Wall Street. Fees, kickbacks, vessels for crap CDO's, etc., etc. It's a Frankenstein creation of the 'money-changers'. They have no incentive to buy gold, to own gold, or even to protect themselves from any Fourth Turning...The money managers have taken care of themselves quite nicely, thank you very much...

dark pools of soros's picture

but, just like that veggie cart dealer in Tunisia, it only takes one to start the fire...  what if one pension fund flipped all assets into silver/gold/oil??   You could probably talk someone in Wisconsin into doing that right about now

MsCreant's picture

Utah? They are trying to pass legislation to pay taxes in silver and gold.

BigJim's picture

what if one pension fund flipped all assets into silver/gold/oil??

Well, here's what happened in Holland when a pension fund had 13% in gold:

       http://www.cnbc.com/id/41519175/Dutch_Central_Bank_pension_fund_must_sel...

The banksters won't let it happen, is what happens.

IQ 145's picture

 Because they're too exposed to a possible decline in the price of gold. You gotta love it. If they put the money in German Government Bonds, like the rest of their portfolio; everything will be fine; because Bonds never go down. WTF ? The fuck they don't. Outrageous.

Freddie's picture

Over 6 months ago the University of Texas endowment bought $500 million in gold.  The entire endowment is about $22 billion. 

Fred Hayek's picture

Apparently they're a hell of a lot smarter than Harvard et al.

Hook 'em Horns!

(And I'm in Massachusetts)

 

Snidley Whipsnae's picture

"In any great organization it is far, far safer to be wrong with the majority than to be right alone."
John Kenneth Galbraith

Unfortunately any pension fund that bucked the Fed/Treasury by loading up on PMs would suffer the fate of Bear Stearns or Lehman Bros...maybe not immediately, but down the road they would be made to pay dearly.

For now it is enough that the Asians and the Mid Easterners are heavy buyers of PMs. They are buoying the PM market sufficiently to prevent the Western CBs/bullion banks/commodities exchanges from manipulating PM prices lower with paper PM garbage. When gale froce 5 inflation winds begin to blow the paper will be swept away like straw in a tornado.

 

 

WilliamShatner's picture

I saw that article today and the EXACT same thought crossed my mind.

When the little guy starts getting in, or at least when the MSM starts talking about the little guy getting in, you need to start working on an exist strategy for you stocks (except for your precious metals stocks).

 

DoChenRollingBearing's picture

@ Capt. Kirk,

I do not see the little guys getting in in a meaningful way until the opportunity has already passed them by.  And so they will not.

I do not think pensions are going to move the needle much re gold.

It will be other big players that move the price of gold (central banks, rich people, etc.).

One guy's opinion.

WilliamShatner's picture

DoChen,

I agree, in fact the second thought that crossed my mind when I read that article was "how many people do I know diving into the stock market?"

Answer: very few

My inclination is that the article was put out to goad the little guys out the into piling back into stocks like Apple, Netflix and Google.

This leads me to believe that the market rally still has some legs and will continue throughout the summer, they need to keep it going so they can pull in as many suckers as possible before they pull the rug out from under them.

I'm still staying in physical precious metals and related stocks as well as a some money in other resource companies like the uranium and rare earth miners.

DoChenRollingBearing's picture

Rare earths...  Did I miss a run there even though I have been looking at that sector for over a year.

At some point I am going to have to pull the trigger and buy AVL and/or MCP.  Then they will down.

stopthenewworldorder's picture

have a butchers at frontier rare earths, way cheaper but a quality asset....

Non Passaran's picture

I agree, too. And like you, I'm long PMs, PM miners, and Uranium.
Miners and Uranium have been very erratic lately, but I plan to stay on board and add some more when I can.

The article is correct. While say 65% of those funds won't do what they should*, if the rest does invests just 5% in PMs, effects on PM prices will be material.
[* how can they when they must maintain 8% yields that spending projections call for!]
And let's not forget that a lot of that money isn't in US funds. I don't think all foreign funds - especially Asian - will sing to the Western anti-PM tune.

NewThor's picture

The best thing about eating gold is pooping gold.

Don't eat ETF GLD paper though, it's boring and painful to poop out.

mynhair's picture

The worst thing about drinking gold is putting up with that crap alcohol they put it in.

Time for a 'gold' single malt.

putbuyer's picture

A video break. Buy Silver. Loading up every week. Read Casey AMAP.

Every time I see a cool video from the chick that lives
semi off the grid, I like to post the video because like
myself, many of us are preparing for survival when the
SHTF. I have my land in NH. The last 4 minutes are
fantastic. Give it a look and enjoy.
http://oko-organic-clothing.blogspot.com/2011/03/juju-donkeys-buck-wild-...

Hulk's picture

Like what she is doing, but I think she may be a bit off her rocker...

lincolnsteffens's picture

If you think that is fantastic I just finished a finger painting you probably want to take home and show  to any of your smoked up friends. This is just a girl with extra time thinking every body really wants to watch her walk up a hill with two pets.

Great Theatre, not.

NOTW777's picture

watch libya - its not settling down

DosZap's picture

It will why OwaWaaah,brings the Pol Refs to the USA, adding to even more crime,burdens,welfare,NO jobs, and starting NEW terrorist cells.WTF, should we be bring more people into this country?, where is the rhyme or reason?

Truthfully I know this man is SET out to destroy this country.

Ckskr.

DoChenRollingBearing's picture

Don't hold back on us now DosZap... 

+ LOLOL

earnyermoney's picture

Watch Bahrain, the proxy fight between Iran and Saudi Arabia.

FunkyMonkeyBoy's picture

Sell low, Buy high. Idiots.

Come one elites, slaughter these fools... i agree, you've converted me, screw humanity, the world would be far better off without these herds of useless docile sheep.

P.S. I am still awaiting delivery of my ticket(s) to the underground facility at Denver airport. I have the 1 oz of gold per ticket ready for payment as agreed.

Judge Judy Scheinlok's picture

Yea baby! Look for the signs "Marla/Tyler" and follow the arrows. Free entry.

FeralSerf's picture

That's the Soylent Green queue -- always free entry to that one.  Marla and Tyler aren't team players (I hope).

gwar5's picture

Institutional investors, that's what I've been saying.... where have they been on gold? Orders from the Fed to steer clear?

If any of these funds start to get serious about U$D Bernankicide, gold has got to go up.  They'll have to jump in sooner or later.

If even a few of them put a toe in the water it would have a big impact.  Greshams' law. Sooner or later they'll figure out that the stock market is denominated in U$D and, in real terms, they have been losing money or merely treading water. 

cetarro's picture

Wasn't it a pension fund that was ordered to sell its gold?

GoinFawr's picture

A warning to what's left of the honestly run funds not 'to get too cute', just buy our quadriple A doubleplusgood rated paper?

DosZap's picture

cetarro

Yes, a Public fund had a Union that had 15%investment, was forced to 5% MAX.

The Gv't didn't apprecite it.

Hannibal's picture

Lets get physical,...physical!

NOTW777's picture

how many 401 or other pension plans offer no PM options?

i ve seen many

hambone's picture

My employer - an industry leader - offers only long and longer and no PM's, no individual stocks, no ETF's.  Enjoy MM or loooooooooooooooong.  Not nice.

NOTW777's picture

i help some people who want a 2nd opinion on managed funds at TBTF banks.  their accounts are often set up to prohibit short vehicles and even some etf and etn products.  unless you complain and get things adjusted you are basically stuck long only equities.  you should see the reaction of the banks when people suggest self directed accounts :)

NOTW777's picture

many company 401 plans only offer a poor selection of long equity funds with little or no access to PMs 

nyse's picture

It almost seems illegal.

 

FeralSerf's picture

It's illegal (and immoral) to let the sheep go unsheared.

"It is better to take what does not belong to you than to let it lie around neglected."
Mark Twain

Bartanist's picture

This article smells of a dotcom business plan....

"the total market is a bazillion and if we only get .1% of that it sends shareholder value to the stratosphere" Are you in?

Too many unfounded assumptions for my taste.

Bay of Pigs's picture

I'm sure the people who have the pensions in TX feel diferently than you do about it. McGuire has them invested in gold.

Did you miss that part?