Why Gold Is Going Higher (In 6 Charts)

Tyler Durden's picture

Submitted by Stephen McBride of Mauldin Economics via ValueWalk

6 Charts That Show the Number One Reason Gold Is Going Higher

Asset prices are at all-time highs around the world. Since 2008, assets under management have increased by a whopping 43%. The reason? Institutional investors have been taking advantage, gobbling up all they can get.

Gold

 

But while institutions have been on a buying spree, there is one asset they have neglected.

And, best of all, there’s no risk attached to owning it.

 

Best Performing Asset Ignored

This asset is considered the best investment of 2016. It’s outperformed the S&P 500 and USD by 19% and 29%, respectively. It is also the only financial asset that is not simultaneously someone else’s liability.

That asset is gold. Up 26% year to date. However, as a percentage of global financial assets, it is near all-time lows.

Gold

 

Gold made up 5% of global financial assets in 1960. Today it is a meager 0.58%.

If that figure returned to its 1980 figure of 2.74%, that would translate into an additional $2.5 trillion flowing into gold and gold stocks. That’s eight times the current market cap of the entire gold industry, which now stands at $324.4 billion.

With the current uncertainty, NIRP, and ZIRP, gold is once more seen as a hedge against inflation.

Since the bear market began in 2011, demand for gold bullion and coins has increased.

But investment demand has stayed low, until now.

Gold

 

Investment demand for gold rose 122% from Q1 2015–Q1 2016. Money flowing into Gold ETF’s jumped over 300%.

However, we haven’t seen capital migration from general financial assets into gold.

So, where have these bullish inflows come from?

 

The Biggest Hedge Funds Are Flocking Into Gold

2016 has brought some of the world’s biggest hedge funds into gold.

Stanley Druckenmiller warned investors to “get out of the stock market.” His firm now holds a 30% position in gold, the firm’s largest currency position.

George Soros cut his US holdings by 37% in Q1 2016. He then purchased 1.05 million shares in the SPDR Gold Trust and took a $264 million stake in the world’s biggest gold producer, Barrack Gold.

Although hedge funds mean large investments, they’re not the main reason gold is flying.

 

Pension Funds Are Pushed Into A Corner

The task of pension funds is to generate stable growth over the long term. This has become increasingly hard with volatile equity markets and low to negative bond yields.

During economic turmoil, investors have usually turned to bonds (Grey areas indicate recession).

Gold

 

But with yields at or below zero, they are no longer yielding real returns for funds.

Although equity markets have risen, general sentiment has been cautious given the recent volatility.

Gold

 

Pension funds in the US totalled $22 trillion at the end of 2015. As a result of poor performance, they are now running a $3.4 trillion deficit. The reality is that the traditional yield sources are either non-existent or too volatile.

Where will pension funds find a way back to profitability?

 

What Happens If Pension Funds Shift Just 0.3% Of Assets Into Gold

The typical pension fund is estimated to hold about 0.15% in gold and another 0.15% in gold mining companies. A total of 0.30% of their overall holdings.

If the US pension funds doubled their gold holdings to 0.6%, this would mean an extra $132 billion flooding into the market.

The World Gold Council estimated that gold demand in 2015 amounted to $334 billion. So this small move from funds would lift investment demand by 39%.

Of course, some of the capital will be allocated to gold equities. The market cap of the five largest gold companies is $81.2 billion.

Given the gold market size, even modest capital migration from these funds would send gold demand soaring.

As the chart below shows, weak equity sentiment is positive for gold.

Gold

 

With ZIRP, NIRP, and increasing volatility in the markets, it’s only a matter of time before funds will turn to gold.

Although gold is up 26% YTD, the above scenario shows that now is a perfect time to enter the gold markets for long-term investors.

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BabaLooey's picture

There is no other way for REAL gold to go....

 

Period.

Latina Lover's picture

1 reason why Gold will stay down in Price:  Banksters screwing metals investors to keep their paper ponzi goiing.

bamawatson's picture

every day i say keep rigging boys
riggers are stackers best friends

38BWD22's picture

 

 

Unfortunately the hedge funds are into gold, and in a big way.  Check out the Commitment of Traders report here:

http://www.barchart.com/chart.php?sym=GC*0&style=technical&template=&p=D...(13369344%2C26112%2C153)%3BCOTDLC(13369344%2C26112%2C153%2C16750848)&chartindicator_1_code=COTLC&chartindicator_1_param_0=13369344&chartindicator_1_param_1=26112&chartindicator_1_param_2=153&chartindicator_2_code=COTDLC&chartindicator_2_param_0=13369344&chartindicator_2_param_1=26112&chartindicator_2_param_2=153&chartindicator_2_param_3=16750848&addindicator=&submitted=1&fpage=&txtDate&sh=150=#jump

Bob Moriarty (321gold.com) wrote recently that you want to be the "smart money", betting against the speculators (hedge funds).......

A big downleg in gold price might chase them out before a meteoric price rise.

 

EDIT: the above link may not work correctly.  Go here:

http://www.barchart.com/futures/cot.php

And navigate your way to the gold COT link.

jeff montanye's picture

before 1934 gold was ten percent or more of investment portfolios.  

traditionally the best thing for gold is negative real interest rates.  guess we got them with negative nominal interest rates and positive but understated nominal inflation figures.

all cartels eventually are broken.  

TrajanOptimus's picture

This will make the gold bugs happy...

Lets consider the ancient historical value of gold.

If we compare the value of gold in Ancient Rome, about the time of Cesar, the typical legion soldier earned 1 aureus of gold every 25 days (equivalent to 25 silver denari, 1 denari had about 4 grams of pure silver in it) 1 aureus has about 1/4 of an ounce of gold in it. So a soldier earned the equivalent of 3 and a half ounces of gold a year. In terms of silver, 3 and a quarter troy ounces of silver equaled 1 aureus at the time of Cesar, so the value of silver was ~1/13th of that of Gold....

Lets do some math

A soldier in the US Army, the equivalent of a legionnaire in Rome, makes about $25,000 a year. If the labor value of gold remained the same throughout history, gold would be worth about $7150 an ounce and silver would be worth about $550....

Lets consider the price of food in Ancient Rome, 1 silver denari at the time of Cesar would buy enough grain to bake about 20 pounds of bread. So in today's terms about 4 grams of silver should be worth 20 loaves of bread. With good bread selling on average $3.50 a loaf, the numbers work...

20 loaves of bread x $3.55 = $71
$71 = 4 grams of silver = 1 silver denar1
1 troy Oz = 31.1 grams
$550 / 31.1 = $17.68 per gram
4 grams to buy 20 loaves
4 x 17.68 = $70.73
$70.73 / 20 = $3.53

If the US dollar was based on silver and gold, and the labor and purchasing power remained the same as the value of gold and silver in ancient Rome 2,000 years ago, silver should be worth $550 an ounce and gold at $7,150 per ounce.

If the US has 8,000 tonne's of gold in Ft Knox (Yeah I am joking but that's what they claim) and there are 32,150 try OZ in a tonne, that is 257,200,000 OZ of gold multiplied by $7,150 per Oz, the gold reserves the US claims to have would only be worth $1,838,980,000,000 or 1.9 trillion dollars.

There was approximately $1.46 trillion in circulation as of June 1, 2016, of which $1.4 trillion was in Federal Reserve notes. So in theory it is possible to back all the physical currency in circulation with the supposed gold reserves the US has based on my Rome comparison above.

 

 

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) TrajanOptimus Aug 20, 2016 9:35 PM

Interesting analysis.  Thanks.

PrezTrump's picture

the world does not have enough gold to back all currency in circulation.

we would need an apocalyptic reset in order for your idea to work.

_ it will never happen.

TrajanOptimus's picture

Read, it was a comparison.

Process, gain understanding.

natxlaw's picture

I've seen similar analysis. Where did you get your average pay figure. I read that the pay for the soldiors was 125 denari a year but Julius Cesar cut the amount of silver in the denarius from 6.4grams to 3.5 grams but increased the soldior pay to 225 denari a year (screwed the currency but kept the soldiors happy by functionally increasing their pay).

 

Another thing to consider, is the 25K a soldior makes now does not include the value of their total compensation package benefits, retirement, free college, VA benefits. Of course, Roman soldiors had some friinge benefits like being able to make any non-citizen carry their cloak for 1 mile. 

Infocat's picture

Silver is much more profitable but i think we should own both Gold and Silver. http://www.truthjustice.net

The central planners's picture

I love riggers beacuse they has this stupid mentality that they can do it forever.

True Blue's picture

What I want to know is; what consistently happens on Fridays? Are Fridays the day the COMEX gets to use the printer?

VonPumperDic's picture

 

 

The Article is about paper gold under management.

any_mouse's picture

Exactly. Soros takes a large position in paper gold and invests in a misspelling of Barrick Gold. Was he just a victim of The Sting?

Can't take an article seriously, in which the headline says "IS going higher" and the subheadline says "BOUND to go higher". Then misspells the world's largest gold producer.

Physical Au has its place as a store of value.

What is needed is productive investments that provide ROI. Whether dividends or interest.

CBs with monetary fire hoses flooding the markets are the problem.

Elephant in the room has diaherra and everybody is discussing the weather outside.

Dame Ednas Possum's picture

Barrack went to nothing years ago... simply a lump of turd sprayed with gold-coloured paint.

stacking12321's picture

"Stanley Druckenmiller warned investors to “get out of the stock market.” His firm now holds a 30% position in gold"

his firm now holds a 30% position in GLD

FTFY

Who was that masked man's picture

Everybody who reads ZH knows that.  The question is when Bro, when?

knukles's picture

I'll letchukno.  Lemme borrow your Rolex. 

Urban Redneck's picture

Do people actually READ Zerohedge or do they just stare at the chart porn and Brazilian pictures?

It is also the only financial asset that is not simultaneously someone else’s liability.

That sentence would be very SILLY, if it wasn't so utterly STUPID, and so far beyond the limits of merely demonstrably false.

It's bad enough when I see that shit in the comments, but when it flies in the articles it drags Zerohedge down to the level of Yafool! Finance, Seeking Alpha, or any paraplegic unfortunate enough to be stuck in front of a television with Jim Cramer in it.

cpnscarlet's picture

It is also the only financial asset that is not simultaneously someone else’s liability

Your right, that's just dumb. SILVER is the other financial asset that's not someone else's liability. Aside from that, you're pretty STUPID as well.

 

Urban Redneck's picture

There are countless financial assets that are not simultaneously someone else's liability, and not just PGMs or silver, or commodities, or land titles, or mineral royalties, and on, and on and on.

You really have to be a dumb to try calling me stupid.

But nice job of demonstrating to everyone else here just how little you actually know about a notion as simple and fundamental to finance as an asset.

BTW - I'm sure all the gold owners who are propping the LBMA and CRIMEX will be happy to hear to their gold either isn't a liability of the LBMA or CRIMEX, or it isn't a financial asset.

TrajanOptimus's picture

I see physical gold as a value benchmark, an asset that can be easilly converted to any currency in the world and is extremely liquid and portable that can not be created out of thin air. Therefore it does have a very useful function and can indeed be considered a financial asset.

In the absence of something you have that I need, I would exchange with you an amout of my local currency for an amout of physical gold. That makes gold money, not currency, money and money IS a financial asset.

Cheers

NEOCON1's picture

ZERO(brain) HEDGE, you mean?  THE SKY IS FALLING! THE SKY IS FALLING!

American Psycho's picture

You forgot the pictures of the Swedish girls.  We come for those as welll.

any_mouse's picture

Swedish girls are reserved for European social crisis. Aryan blondes and dark, swarthy men.

Brazilian girls are for financial articles. Something about inflated assets and bubbles [butts].

Lost in translation's picture

I'm here for the comments. ZHers teach me more than the essays do.

Maestro Maestro's picture

 

 

Article 1, Section 10 of the United States Constitution says that only gold and silver are money and that debt-based currencies (such as the current US Dollar aka Federal Reserve Notes) are ILLEGAL!

 

And you're looking for reasons for gold and silver to go up?

 

You Americans are an abomination.

 

USA=ISIS

 

 

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Maestro Maestro Aug 20, 2016 3:20 PM
Section 10.

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing it's inspection laws: and the net produce of all duties and imposts, laid by any state on imports or exports, shall be for the use of the treasury of the United States; and all such laws shall be subject to the revision and control of the Congress.

No state shall, without the consent of Congress, lay any duty of tonnage, keep troops, or ships of war in time of peace, enter into any agreement or compact with another state, or with a foreign power, or engage in war, unless actually invaded, or in such imminent danger as will not admit of delay.

 

Unfortunately, you are wrong.

No Zbig Deal's picture

Your penultimate point is correct. How is the weather in Pala this time of year?

Yars Revenge's picture

Gold has a strong inverse correlation with Treasury yields, which are at records lows and should be moving higher in the near future.

This would push the dollar higher which may get an extra boost from the demise of the Euro, which is looking more and more likely everyday.

Additionally, anytime gold bulls start coming out of the woodwork claiming gold's fixing to explode to the upside, it does the opposite.

Take together, all these factors are bearish for gold.

J Pancreas's picture

Amazing to think that many people on ZH still think they will get rich by hoarding gold coins like squirrels hoard their acorns. Gold just preserves your wealth. Doesn't make you rich and certainly won't make you poor either. Why not buy some companies that pay divvies until the world collapses and get some fresh air. IMO the Feds held things together with glue and duct tape this long so they might be as incompetent as the basement dwellers on here believe.

cpnscarlet's picture

Problem 1 with your post - not even the utilities pay a dividend greater than the true rate of inflation.

Dame Ednas Possum's picture

Ahhhh... of course, the Orifice of Omaha.

I prefer his old man's opinions on gold and freedom.

WmMcK's picture

Over 5 years old, but worth a (re-)read if you can tolerate the likes of JB:

http://www.zerohedge.com/article/howard-buffett-said-human-freedom-rests...

Of course I should use Cognative Dissonance's excellent suggested alternative title:

"Continued Human Enslavement Assured If Silly Humans Allowed To Play With Shiny Objects Such As Gold"

FEDbuster's picture

I diversified my metals portfolio this past week.  One more AR15 and another 1000 rounds  of M855.  Gun shop owner said to me "decided to beat the pre-election rush?" I said "yup".

Global Douche's picture

I may well add a gun stock or two. If Hitlery wins or loses, they should do well regardless.

J Pancreas's picture

I forgot to add the "not" in front of incompetent but who really knows. I've learned to stop worrying and love the bomb.

Consuelo's picture

 

 

Rank Amateur...

 

Now then, back to YOUR basement; polish up that turd and get your MDB on the right way before posting again.

 

 

Mustafa Kemal's picture

I do feel like a squirrel with acorns, and I dont feel like the grasshopper with the fiddle.

I dont care if I get rich or not, but when this thing goes I would like for my family to have something they can use. And if it doesnt, they can just talk about grandpa and his eccentric ways, and someday they may found about about his stack of acorns.

Regarding the Fed, I hear them being accused of incompetence, but I think they are extremely competent. They just dont work for you.

Dame Ednas Possum's picture

They know exactly what they are doing... it's called wealth transfer. And they must piss themselves laughing when they meet in their temple/ lodge to share stories and agree how to implement the protocols, whether by banking, media, politics, espionage, chaos or outright war when they gleefully bathe in the blood that flows from the sacrificed children of the idiotic goy sheeple.

Montana Cowboy's picture

When I responded, you had 2 ups and 13 downs. I up-voted you. When people think they will get rich from gold, I just ask them about their exit strategy. When will you sell? Then it becomes obvious that gold only preserves wealth. If the dollar is declining, and you sell your gold for big dollar profits, you obviously have no wealth increase. Not so obvious is the fact that you will also lose the protection that motivated you to buy the gold in the first place. This is not an investment. Miners are an investment. I'm not promoting that as an investment. But that is how you would invest in gold for the mid to long term. Futures are for the short term. Physical is for neither.

DjangoCat's picture

Agreed gold is not an investment.  It is a stable store of value.  Some of us, at the later end of the age spectrum, are no longer gung ho on something new and better.  We just want our asset to be there tomorrow.

Traditional sources of income, bonds, GICs, Investment trusts no longer provide any income at all.  Stocks and bonds go up, but that is a mirage, a bubble that will burst, leaving many fish flopping in the mud.  The trouble with gold is the danger of confiscation.

Bitcoin may be a better alternative, provided the internet stays up.

 

 

 

 

 

 

 

JustUsChickensHere's picture

Bitcoin is not an alternative. It is another asset with only systemic risk but no counter party risk (same as physical Gold and Silver)

So the clever people are allocating a portion of their assets to physical gold, physical silver and (digital) Bitcoin ... in whatever their preferred percentages are. Bitcoin has the advantage of portability over physical gold/silver, but the disadvantage of being complex and volatile.

ljag's picture

As you may have heard, we transferred the stewardship of the Internet to the U.N. or some such entity therefore Bitcoin et al DO HAVE COUNTER PARTY RISK....that being the dependence of "that entity" to turn on the Internet.....no?

OverTheHedge's picture

Firstly, this article is just weekend padding, so don't take it too seriously.

Secondly, gold will be a store of value, until it is confiscated. I'm trying to get the timing right, by selling gold to buy land, but not yet. I need my neighbours to be more desperate than they are yet, or gold to go through the roof, as I don't have quite enough to convince them to sell, just yet.

The next trick will be to have the government not seize either the land or its produce. That one will be trickier. Also, marauding armies may be an issue.

It's all a stab in the dark, frankly, and I would have been better off with Amazon or Apple, but is that true now? No idea, so I will stick with gold for the minute. But not for too long....