3. CHINA'S GOLD RESERVES
"China increases its gold reserves in order to kill two birds with one stone"
"The China Radio International sponsored newspaper World News Journal(Shijie Xinwenbao)(04/28): "According to China's National ForeignExchanges Administration China 's gold reserves have recently increased.Currently, the majority of its gold reserves have been located in theU.S. and European countries. The U.S. and Europe have alwayssuppressed the rising price of gold. They intend to weaken gold'sfunction as an international reserve currency. They don't want to seeother countries turning to gold reserves instead of the U.S. dollar orEuro. Therefore, suppressing the price of gold is verybeneficial for the U.S. in maintaining the U.S. dollar's role as theinternational reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."
Perhaps now is a good time to remind readers what will happen if andwhen America's always behind the curve mutual and pension fund managersfinally comprehend that they are massively underinvested in the one bestperforming asset class.
From The Driver for Gold You’re Not Watching (via Casey Research)
You already know the basic reasons for owning gold – currencyprotection, inflation hedge, store of value, calamity insurance – manyof which are becoming clichés even in mainstream articles. Throw in thesupply and demand imbalance, and you’ve got the basic arguments for whyone 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, especiallyif you don’t own a meaningful amount; and yes, I’m convinced the priceis headed much higher, regardless of the corrections we’ll inevitablysee. Each of the aforementioned catalysts will force gold’s pricehigher and higher in the years ahead, especially the currency issues.
But there’s another driver of the price that escapes many goldwatchers and certainly the mainstream media. And I’m convinced thatonce this sleeping giant wakes, it could ignite the gold market likenothing we’ve ever seen.
The fund management industry handles the bulk of the world’s wealth.These institutions include insurance companies, hedge funds, mutualfunds, sovereign wealth funds, etc. But the elephant in the room ispension 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 JohnPaulson, David Einhorn, Jean-Marie Eveillard. There are close to twentymutual funds devoted to gold and precious metals. Lots of gold andsilver 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. Heestimates another 0.15% is devoted to gold mining stocks, giving us atotal of 0.30% – that is, less than one third of one percent of assetscommitted to the gold sector.
Shayne is head of global research at the Teacher Retirement Systemof Texas. He bases his estimate on the fact that commodities representabout 3% of the total assets in the average pension fund. And of that3%, about 5% is devoted to gold. It is, by any account, a negligibleportion of a fund’s asset allocation.
Now here’s the fun part. Let’s say fund managers as a group realizethat bonds, equities, and real estate have become poor or riskyinvestments and so decide to increase their allocation to the goldmarket. If they doubled their exposure to gold and gold stocks – whichwould still represent only 0.6% of their total assets – it would amountto $93.3 billion in new purchases.
How much is that? The assets of GLD total $55.2 billion, so thisamount of money is 1.7 times bigger than the largest gold ETF. SLV, thelargest silver ETF, has net assets of $9.3 billion, a mere one-tenthof that extra allocation.
The market cap of the entire sector of gold stocks (producers only) is about $234 billion. Thegold industry would see a 40% increase in new money to the sector. Itsmarket cap would double if pension institutions allocated just 1.2% oftheir assets to it.
But what if currency issues spiral out of control? What if bondswither and die? What if real estate takes ten years to recover? What ifinflation becomes a rabid dog like it has every other time in historywhen governments have diluted their currency to this degree? If thesefunds 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 fundsmanage approximately $1.7 trillion. Sovereign wealth funds control $3.8trillion. Then there are mutual funds, ETFs, private equity funds, andprivate wealth funds. Throw in millions of retail investors like youand me and Joe Sixpack and Jiao Sixpack, and we’re looking in the rearview mirror at $100 trillion.
I don’t know if pension funds will devote that much money to thissector or not. What I do know is that sovereign debt risks are far fromover, the U.S. dollar and other currencies will lose considerably morevalue against gold, interest rates will most certainly rise in theyears ahead, and inflation is just getting started. These forces are inplace and building, and if there’s a paradigm shift in how thesemanagers 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 tinysector will light on fire with blazing speed.
My advice is to not just hope you can jump in once these drivers hitthe gas, but to claim your seat during the relative calm of thismonth's level prices.