Pension Funds: Why $5,000 Gold May Be Too Low! (+2K Views)

 

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. [T]here is another driver of the price, however, that escapes many gold watchers and certainly the mainstream media [a]nd I’m convinced that once this sleeping giant wakes, it could ignite the gold market like nothing we’ve ever seen. [Let me explain.] Words: 788

This article is an edited ([ ]) and revised (…) version of the original by Jeff Clark 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.

The fund management industry ( insurance companies, hedge funds, mutual funds, sovereign wealth funds, etc.) handles the bulk of the world’s wealth [b]ut the elephant in the room is pension funds. These institutions provide retirement income, both public and private [and their] global 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).

Pension Fund Holdings of Gold Assets are Negligible

[A look at the pie chart below shows that] the percentage of gold holdings in a typical pension fund is negligible – a scant 0.30% split 50/50 between gold bullion and gold mining stocks – according to estimates by Shane McGuire in his recent book.

Shane is head of global research at the Teacher Retirement System of Texas and bases his estimate on the fact that commodities represent about 3% of the total assets in the average pension fund [a]nd of that 3%, about 5% is devoted to gold.

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… – an amount of money 1.7 times bigger than the largest gold ETF – SLV. [Indeed,] if pension institutions allocated only 1.2% of their assets to just gold stocks the gold industry would see a 40% increase in the market cap of the sector.

What would happen if currency issues were to spiral out of control? What would happen if bonds were to wither and die? What would happen if it took real estate ten years to recover? What would happen if inflation were to become a rabid dog like it has every other time in history when governments have diluted their currency to this degree? What would happen if pension funds were to allocate just 5% of their assets to gold — which would amount to $1.5 trillion?  [The answer to every question is the same.] It would overwhelm the system and rocket prices skyward.

[L]et’s not forget that pension funds are 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 [to what extent] pension funds [and the abovementioned other institutions] will devote… to this sector [but] 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.

If there’s a paradigm shift in how… [pension fund] managers view gold, look out because once fund managers enter the gold market in mass, this tiny sector will light on fire with blazing speed!

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