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
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
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
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
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.
Editor, Casey’s Gold & Resource Report
Jeff Clark is
the editor of BIG GOLD, Casey Research's monthly advisory on gold,
silver, and large-cap precious metals stocks. If this is the kind of
in-depth information you’d like to utilize for your investments,
give BIG GOLD a risk-free try with 3-month money-back guarantee.