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…If some of the world’s largest investment funds decided to make even a small increase
in their allocation to physical gold and gold stocks it would be like trying to drain Niagara Falls with a fire hose. Just a small percentage increase in allocation towards gold and gold stocks among global fund managers would make gold stocks double, and then double again – and double again.
This article is an edited ([ ]) and revised (…) version of an article by Marin Katusa to ensure a faster & easier read. It may be re-posted as long as it includes a hyperlink back to this revised version to avoid copyright infringement.
Extraordinary price moves can happen when money flows into a small sector
[It is important to] realize that the managers of these large investment funds are just regular people. They are as likely to fall victim to groupthink as anyone. They don’t like to stray far from the herd. They tend to make the same decisions at the same time so, when a group of large investment funds decides to buy into a market, they can put well over $100 billion to work.Typically these large investment fund managers stick to very large, very liquid markets like large-cap U.S. stocks and corporate bonds. Some, however, occasionally stray from the herd and buy into less liquid markets. For example, some of them will buy gold stocks and physical gold.
If concerns over the safety of the global monetary system increase (as they did in 2008), more than a few large funds will want to buy gold and gold stocks for both protection and profit potential and all that money will flow into a relatively tiny sector. The current market value of all major publicly-traded gold companies is around $330 billion. This might sound large, but it’s actually tiny in global finance terms.
The entire gold mining industry is smaller than just Facebook ($500 billion market cap) or Google ($650 billion market cap). The chart below shows this comparison, along with Apple and U.S. oil and gas industry for good measure.
To look at it from another angle, consider the $20 billion market cap of the world’s largest gold mining company, Newmont. Newmont is a giant that shapes the industry. It does some of the biggest deals. It has the resources to hire the industry’s best people. It produced over 5 million ounces of gold in 2016. That’s a tremendous amount of gold yet a $20 billion market cap won’t even get you a spot on the top 20 North American oil and gas companies. Newmont is smaller than 266 companies in the benchmark S&P 500.
If just 10 out of the hundreds of money managers around the world with more than $50 billion to invest were to each place just 1% of their portfolios into Newmont, they would buy 25% of Newmont. That very small ripple in the ocean of large fund management would produce a buying tsunami that lands on the shores of the gold mining industry…
There’s an old saying “A rising tide lifts all boats.” Well, when the tide flows into a small market sector such as gold, the boats can rise 10, 50, even 100 times higher. They go from sitting quietly in the harbor to riding tsunamis of investor money.
Right now, it’s estimated that 1.4% of the world’s financial assets are allocated to gold and gold stocks. This laughably small percentage shows the world doesn’t care much about gold right now but just a modest increase in this allocation percentage would hugely influence gold stock prices (some money would go into physical gold and gold ETFs, but a lot would flow into gold stocks as well).
To be clear, I’m not saying the world’s biggest money managers will wake up one day, decide to allocate 10% of their portfolios to gold and gold stocks and make gold and gold stocks double in a single trading session. [What I am saying, though, is]…that if gold enters a bull market, it’s going to be front page news. It’s going to come up at investment committee meetings. Big money managers will feel pressure to allocate to gold. People will begin to see buying gold and gold stocks as a prudent way to ensure portfolios against a global monetary accident. Moving substantial amounts of money into gold and gold stocks would be a gradual, multi-year process.
I believe a gold price breakout above $1,400 per ounce is coming soon. This would represent a multi-year high in the gold price. It would be a nice round number the media can quote and hype. It will ignite more and more interest in gold [and all that] investor money investor money will flow into a tiny area.
My advice: get into gold stocks before the large investment funds do.
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