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« Gold and Silver Still Dollar Dependent | Main | Pretivm Resources Inc. On the Watch List »
Tuesday
Mar082011

The Driver for Gold You’re Not Watching

casey 1 09 march 2011.JPG
Jeff Clark, BIG GOLD

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.

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.



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Many thanks to those of you who have recently signed up for options trading service, its very much appreciated. Please be patient as we have a number of new trades on the drawing board and as you are aware the timing of them is critical to their success.

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The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


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Reader Comments (16)

gold and silver are both up so far this year but have you noticed the stocks have failed to make new highs.? yes ,certain individual stocks are up but the total market(HUI etc) is not.
At Toronto Michael Jansen of JP Morgan predicted a gold price of $1500 by the end of the year. In other words flat from now on as we are already nearly there.He also said that investors were moving out of gold stocks and into equities ; if correct we are on the verge of a correction in gold stocks.
All this depends on if you believe anything JP Morgan tells the market ! Any thoughts anyone ?

March 9, 2011 | Unregistered Commentergold bug

Hey Gold Bug, Do you really want to trust anything JP Morgan or Goldman Sachs or any of that crowd says? No better than believing Chinese Statistics or whatever they say. On another point, Yamana has not had a take over bid yet, but did the next best thing and are now cash rich. Anyone think that this stock is not undervalued? Roger.

March 9, 2011 | Unregistered CommenterRoger

Morgan is the enemy of all decent people in the world and, while I wouldn't go so far as to say all their analysts are con men and not to be trusted, you have to look for the hidden agenda. It's not as if they're serving their customers. What a quaint notion. And the Morgan guy doesn't know anything more than you and I do. So, he works at Morgan. Big deal. I make educated guesses from my home. He makes them from a fancy office. The future is uncertain. Anything can happen. We're both GUESSING.

Yamana undervalued? Yes.

Mining stocks undervalued on balance? Yes.

Could there be a selloff? Yes.

Could there be a blowoff? Yes

Are gold and silver and mining shares the investment of a lifetime? Yes.

March 9, 2011 | Unregistered Commenterfallingman

If you want a takeover target try NDM in Canada. There CEO has always said he planned a sell off at sometime and they have one of the largest gold/copper deposits in the world. The stock is on a roll.
Yamana. ? ON FeB 17 2009 the stock was $11.92 ; it`s high was 17.71 in 2008. Where is it know ? Just over $12 . No excitement there then ! Look what you would have made on Fronteer SLW and deavor in that time just to name a few

March 9, 2011 | Unregistered Commentergold bug

Yeah, AUY's been stuck. No question. And I owned FRG, SLW, and EXK, and haven't owned AUY for a while, but that doesn't mean AUY isn't undervalued. Timing is a screwball thing. Barring the end of the world, which is always possible, given the actions of the Fed, the value probably will be recognized, and likely all at once, kind of like silver's value was unrecognized and then the price skyrockets.

Past performance is no indication of future gains...or losses.

March 9, 2011 | Unregistered Commenterfallingman

Did not have Fronteer but Endeavour has been a doosy as has been Canadian Zinc. Nevertheless I am investing in Uranium, seems to be where gold was tne years ago. Will there be a sell off? Well I for one doubt it but I certainly hope so. Roger

March 9, 2011 | Unregistered CommenterRoger

In addition to Uranium, how about rare earth elements?

Getting back to gold, I read something today that is supposed to be hot off the press, and here is the partial quote from the article:

"That "development" is that the Bond King, Bill Gross, the single largest bond fund manager in the world has dumped ALL of his US Treasury holdings".

If this info is true then it should impact the dollar, interest rates, and gold. Has anyone heard anything about this?

March 9, 2011 | Unregistered CommenterJohn Ell

Believe me, if PIMCO had dumped all their treasuries, you'd have known it. It would have buried the bond and equity markets and the clownbuck. Besides, they're such a big player, they're pretty much stuck with what they've got. Sell in size and they take a bath.

And who exactly would buy that trash? The Chinese? The Fed? Who, besides the Fed is dumb enough to buy treasury junk at these rates. Only an artificial buyer with newly conjured "money" can keep this garbage levitating. So far, it's working. But if the likes of PIMCO ever do start bailing in earnest, look out.

March 9, 2011 | Unregistered Commenterfallingman

John,

We just don't have the resources to look at rare earth elements in any meaningful detail. We do welcome comments on our uranium-stocks site, but we would rather not put forward suggestions regarding which stocks to buy, etc.

Although it is an exciting and a hot sector at the moment!!

March 9, 2011 | Unregistered CommenterGold Prices

We've not seen anything regarding PIMCO selling bonds, but who wouldn't dump em?

March 9, 2011 | Unregistered CommenterGold Prices

The big golds are performing poorly. We switched in August from them to SLW which has done well, however, the smaller silver producers, two of which we own, EXK and AG have been explosive of late on the back of silver prices.

March 9, 2011 | Unregistered CommenterGold Prices

Gross is all out.

I guess I should keep my big mouth shut. Apologies Mr. Ell.

It seems Mr. Gross has been steadily feeding Treasury junk to the Bernanke since last year and he's now all out. It must be nice to have someone hold the exit door open for you like that. That's why his selling didn't crater the market one has to suppose. Who will step up to the plate to buy if the Fed stops buying? Can you say NO ONE...at least no one at anything near these rates. My guess is that they either won't stop or won't stop for long...because they can't. But hey, what do I know?

No need to answer that. Clearly: Not much.

Here's the story from the NY Post:

Who will buy Treasuries when the Fed doesn't?" Bill Gross asked last week in his monthly missive. Yesterday the co-founder and chief investment officer of Pimco answered, by saying "not me."

Pimco, the world's largest bond fund, sold off all its government-related debt from its flagship fund.

"Nearly 70 percent of the annualized issuance since the beginning of QE2 [second round of quantitative easing] has been purchased by the Fed, with the balance absorbed by those old standbys -- the Chinese, Japanese and other reserve surplus sovereigns," Gross said of the recent bond action.

He also cited extreme embezzler Bernie Madoff in his letter, likening the Fed debt buying to a Ponzi scheme, which works until it doesn't.

Pimco's $237 billion Total Return Fund cut its Uncle Sam debt holdings to 12 percent of assets in January, according to the Newport Beach, Calif., company's Web site. The fund's net cash position surged from 5 percent to 23 percent.

Some bond traders say this action and talk about European Central Bank raising rates at its next meeting in April as being the canaries in the coal mine for any further action by the Fed after QE2.

"Yields on Treasuries may be too low to sustain demand for US government debt as the Federal Reserve approaches the end of its second round of quantitative easing," Gross wrote in a monthly investment outlook posted on Pimco's Web site on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to more attractive levels.

"Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent," Gross wrote. A basis point is one-hundredth of a percentage point.

The Fed is scheduled to complete its purchases of $600 billion of Treasuries in June. Gross said investors should look at the end of June as if it were D-Day, since both bond and equity markets have been artificially inflated by Fed chief Ben Bernanke's money-printing.

Read more: http://www.nypost.com/p/news/business/pimco_sells_off_all_its_treasuries_UVnug3Z8hxAVkAq4J3vpDP#ixzz1GDSw3F94

March 10, 2011 | Unregistered Commenterfallingman

Fallingman, what a investigative job you did and it sure brought me, and anyone else who read your post, up to speed.
Thanks for the heads-up. Ironically, I wonder about the reprecussions that this thing might have and how much it is going to add to the overall market tension that I, for one, feel. I am of the opinion to lighten up on everything, put stops where I should, and think about "Puts" in the option market. We sure are heading into uncharted waters.
John

March 10, 2011 | Unregistered CommenterJohn Ell

(Reuters) – The world’s largest bond fund has gone ultra bearish on the United States, dumping all of its U.S. government-related debt holdings.

The move by Bill Gross’s $236.9 billion PIMCO Total Return fund completed last month comes in the wake of a vicious Treasury market sell-off and just days after he questioned who will buy Treasuries once the Federal Reserve halts its latest round of bond purchases in June.

Gross, who also helps oversee a $1.1 trillion investment portfolio as PIMCO’s co-chief investment officer, has repeatedly warned against U.S. deficit spending and its inflationary impact, which undermine the value of government debt and push up yields as investors demand more compensation for risk.

http://jsmineset.com/

March 10, 2011 | Unregistered CommenterGold Prices

Thank you to all who responded with information about the question I raised several days ago about the Bill Gross Treasury Bond issue. I couldn't find out anything most likely because I didn't know where to search, and you all came through. What a great website.

March 10, 2011 | Unregistered CommenterJohn Ell

Team,

We checked with a 'broker' friend of ours this morning and he said that Bill Gross had been gently unwinding for some time.

March 10, 2011 | Unregistered CommenterGold Prices

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