Asset prices are at all-time highs around the world. Since 2008, assets under management have increased by a whopping 43%. The reason? Institutional investors have been taking advantage, gobbling up all they can get.
But while institutions have been on a buying spree, there is one asset they have neglected. And, best of all, there’s no risk attached to owning it.
This asset is considered the best investment of 2016. It’s outperformed the S&P 500 and USD by 19% and 29%, respectively. It is also the only financial asset that is not simultaneously someone else’s liability.
That asset is gold. Up 26% year to date. However, as a percentage of global financial assets, it is near all-time lows.
Gold made up 5% of global financial assets in 1960. Today it is a meagre 0.58%.
If that figure returned to its 1980 figure of 2.74%, that would translate into an additional $2.5 trillion flowing into gold and gold stocks. That’s eight times the current market cap of the entire gold industry, which now stands at $324.4 billion.
With the current uncertainty, NIRP, and ZIRP, gold is once more seen as a hedge against inflation.
Since the bear market began in 2011, demand for gold bullion and coins has increased.
But investment demand has stayed low, until now.
Investment demand for gold rose 122% from Q1 2015 – Q1 2016. Money flowing into Gold ETF’s jumped over 300%.
However, we haven’t seen capital migration from general financial assets into gold.
So, where have these bullish inflows come from?
2016 has brought some of the world’s biggest hedge funds into gold.
Stanley Druckenmiller warned investors to ‘'get out of the stock market'’. His firm now holds a 30% position in gold, the firm’s largest currency position.
George Soros cut his US holdings by 37% in Q1 2016. He then purchased 1.05 million shares in the SPDR Gold Trust and took a $264 million stake in the world’s biggest gold producer, Barrack Gold.
Although hedge funds mean large investments, they’re not the main reason gold is flying.
The task of pension funds is to generate stable growth over the long term. This has become increasingly hard with volatile equity markets and low to negative bond yields.
During economic turmoil, investors have usually turned to bonds (Grey areas indicate recession).
But with yields at or below zero, they are no longer yielding real returns for funds.
Although equity markets have risen, general sentiment has been cautious given the recent volatility.
Pension funds in the U.S. totalled $22 trillion at the end of 2015. As a result of poor performance, they are now running a $3.4 trillion deficit. The reality is that the traditional yield sources are either non-existent or too volatile.
Where will pension funds find a way back to profitability?
The typical pension fund is estimated to hold about 0.15% in gold and another 0.15% in gold mining companies. A total of 0.30% of their overall holdings.
If the US pension funds doubled their gold holdings to 0.6%, this would mean an extra $132 billion flooding into the market.
The World Gold Council estimated that gold demand in 2015 amounted to $334 billion. So this small move from funds would lift investment demand by 39%.
Of course, some of the capital will be allocated to gold equities. The market cap of the five largest gold companies is $81.2 billion.
Given the gold market size, even modest capital migration from these funds would send gold demand soaring.
As the chart below shows, weak equity sentiment is positive for gold.
With ZIRP, NIRP, and increasing volatility in the markets, it’s only a matter of time before funds will turn to gold.
Although gold is up 26% YTD, the above scenario shows that now is a perfect time to enter the gold markets for long-term investors.
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