Wednesday, January 9, 2013

The Gold Bull Stage 2: Here Come The Pensions

Pension money invested in bullion is 'peanuts' at the moment...If 1 percent of their total assets shift to the metal, the gold market would explode. - Itsuo Toshima, advisor to Japanese pension funds (Bloomberg, link provided below)
I have maintained since 2002 that the precious metals and mining stock market would eventually erupt into bull market frenzy that would at least rival, and likely succeed, the bull market frenzy we saw in tech stocks. Part of what will fuel this frenzy is the enormous flow of institutional investor money, globally, that will eventually find its way into the precious metals and mining stock sector. Because the amount of potential capital from institutions from just a small increase in sector allocation - relative to the total size of the precious metals/mining stock sector - the price effect is potentially enormous.

There are a lot of solid fundamental reasons for this. But from a technical perspective, the total size by market capitalization of the gold, silver and publicly traded mining stocks combined is absolutely minuscule in relation to the total size of global investible institutional assets. To put this in perspective, the market cap of each of the top 15 stocks in the S&P 500 is individually larger than the total market of the entire publicly traded mining stock sector (1). Think about that for a minute. Apple has a bigger market cap than every single mining stock globally combined.

 (1) I get this number by taking the total market cap of all mining stocks globally as of March 2009, calculated by Ibbotson & Assoc of $150 billion LINK, and grossing this number up by 25%, which is a blended rate of appreciation between the XAU and the Canadian Venture Exchange, which is the commonly accepted benchmark for junior mining stocks. The market cap of the 15th largest stock in the SPX is $204 billion: LINK.

Interestingly, if you think about it, to what extent can Apple possibly achieve even more market penetration and customer-base growth over the next 5 years? It is likely that Apple's market saturation and ability to innovate and create demand has plateaued. At very best, its growth curve has largely flattened. The ole law of diminishing marginal returns - yes, it's a bona fide law of economics/nature - had to get its claws into Apple eventually. Apple stock happens to be the largest holding across all hedge funds.

Now compare that to gold, silver and mining stocks. This visual should help:

(click on chart to enlarge)

Compared to Apple on a relative basis, the "market penetration" into the precious metals sector by institutional investors is quite tiny and there is significant room for institutions to move into and saturate the precious metals sector.

Now, compare this global asset allocation to the last bull market peak for precious metals back in 1980. Back then precious metals represented 6% of total global assets invests. In other words, the amount of global cash invested in precious metals on a relative basis was 6 times greater than it is today. By this measure alone, not only is the precious metals sector unequivocally not in an investment bubble, but it is absurdly undervalued.

I bring this up because it now appears as if the precious metals sector is starting to get the attention of the big institutions. Certainly everyone is now aware that Pimco's Bill Gross was quite vocal in advocating gold during 2012, including his latest comments: LINK

Pimco manages about $2 trillion. The total market value of ALL of the gold held at the Comex, including the customer gold that is not available for delivery, is $18 billion. If Pimco were to allocate 5% of its asset base to buying physical gold, that amount ($100 billion) is 5 times greater than all of the gold held at the Comex. That's just one U.S. institutional investor.

Interestingly, I saw a story posted on Bloomberg late last night about the movement of Japanese pension funds into gold:
Japanese pension funds, the world's second-largest pool of retirement assets after the U.S., will more than double their gold holdings in the next two years as the new government pushes for a higher inflation target, according to an adviser to the funds.
Here's a link to the article: Gold Lures Japan's Pension Funds
Japan's new Prime Minister has explicitly stated that he will implement whatever monetary policy is required to stimulate a 3% inflation rate. The pension funds are responding in kind by moving into gold.

This is just getting started on a global institutional investor basis and it's in its nascence in the United States. Japanese pensions have $3.36 trillion (U.S. dollars) under management. This number in the U.S. is over $20 trillion (Rockefeller Foundation).

So Pimco alone can wipe out the Comex 5 times over with just a 5% allocation to gold. Consider that the total market capitalization of all publicly traded mining stocks is around $200 billion, with the top 5 stocks comprising a large portion of this. Now run the scenario if just U.S. and Japanese institutional investment managers allocate 5% of their portfolios to gold and mining stocks.

You can see where this analysis is headed. This is not my original thinking, as I vividly recall James Dines (The Dines Letter) laying out the case for this sector back in mid-2001, and stating that the eventual bull run in the precious metals/mining stock sector would dwarf the bull run we saw in internet/tech stocks.

The bottom line is that, typically, with big institutional money managers, an investment trend starts slowly and then happens all at once. It is a herd of cattle that you want to be positioned aggressively in front of before the stampede starts. Based on the murmurs being made by the money managers like Bill Gross and by the Japanese pension investors, I would say that the cattle are looking at the open gate and getting ready to make a run for it.


  1. This is extremely important information. I did not know this until this post. Thank you for sharing. I am definitely going to let all of my friends in the property management market read this post.

  2. Greetings & Salutations Dave,

    I've bookmarked this entry for future reference for family & friends, as well as for those dark & stormy nights when my nerves are shot. I refuse to get bucked off the bull by the pack of wovles in sheeps clothing!

    I'm planning a trip to Croatia later on this month for the soul purpose of transfering some of my physical to the old continent. May God Bless you & yours in 2013.

  3. Hi Dave,
    Love your blog. Question - in your third paragraph did you mean "billion" and not "million"?

  4. Secrets and Lies of the Bailout: One Broker's Story

    This is the real problem with the bailouts, and the issue we tried to underscore with the "Secrets and Lies" piece. With their hide-and-seek policies, bogus stress testing and stubborn insistence on calling failing banks healthy and publicly endorsing other such fibs, the architects of the federal rescue (from both the Bush and Obama administrations, as well as from the Federal Reserve) created a two-tiered market. The new economy has two classes of investors: those who know the real numbers, and those who don't.

    So while the proponents of the bailout will argue they were a success, and the covert and overt federal support helped bring the Dow all the way back from below 7,000 to above 13,000 – seemingly a good thing no matter how you look at it – there's another bitter reality, which is that the bailouts officially created a sucker class.

    Read more:

  5. Substitute the word billion for million two times when describing Market caps of mining stocks and the spx.

  6. Thanks for the heads up on the typos!

  7. “in a world of thieves, the only final sin is stupidity.”

    Once the coin were struck, it would become obvious to the global marketplace – producers, consumers, savers, investors and trade partners – that future global purchasing power would be left exclusively in the hands of the US Treasury. Treasury would be able to simply outbid everyone on the planet for everything.

    We suspect the Japanese Ministry of Finance would soon mint a ¥100 trillion pair of chopsticks and put them on deposit with the BoJ. They could then purchase most if not all of the oil on the market today for future consumption! We are confident oil exporters would not raise their prices because they would have the magic chopsticks as collateral. And why wouldn’t all the world’s treasury ministries simply create priceless flux capacitors and use them to create all the taxes needed to self-fund their governments? (To do so Ben Bernanke would have to hand over its proprietary technology – the Fed “has a technology called a printing press…”)

  8. I like your blog too. I read it a lot. Thanks for posting this guidance. It's so ironic that the US, which has so fought the general ownership of gold, and indeed, gold's entire existence, will be the last steer out of the gate you mention, so nothing but crumbs, if that, will be left for its own citizens after the herd stampedes. The world seems to be abounding in such deep ironies at the moment. History's great tectonic plates are shifting. And so many, many people are frantically pretending not to notice.

    1. Thanks for the feedback. I don't think people are pretending to not notice. I think most people prefer to take the path of least resistance, which is to do their jobs, follow orders and not use their brains. The "crumbs" will be swept off the table too, eventually.

  9. Great stuff, but will Japan's pension funds buy physical gold and take it off the market? Not likely, it will be all paper gold investments.

    1. Depends. Initially they'll likely buy GLD. But to the extent that they buy PHYS, it's the same thing as creating off-take. GLD we don't know for sure, but PHYS buys phys.

      Eventually there's going to be an accident/delivery default and a lot more entities will start buying and safekeeping the metal. It will happen - just a matter of time.

      The Chinese take down physical. They know the TRUTH. I know for a fact that the main Chinese sovereign wealth fund spent a lot time chatting with GATA board members. They understand...soon more will...

    2. Gold emerges as euro debt-crisis option
      The European Union is running out of options as it seeks to emerge from the debt crisis burdening member states. Economist Ansgar Belke, an important voice in advising Europe’s politicians on what can be done next, explains how the use of gold as collateral can support struggling countries’ sovereign bond issues.

      Lars Schall: How did it come about that you authored a paper for the EU Parliament related to gold-backed bonds? [1]

      Ansgar Belke: This was really necessary because we lack any solution to the current euro crisis, and politicians tried on and on to solve the crisis with ineffective and partly counterproductive efforts to use monetary policy to solve the structural issues the eurozone is currently plagued with. The European Central Bank [ECB] opened up its third round of secondary bond market purchases on September 6, 2012. Whether they deliver a permanent reduction in bond yields in the South is highly uncertain. If the ECB's latest sovereign bond purchase program consisting of Outright Monetary Operations [OMTs] fails, then Europe's options look grim.

      Austerity and growth program have not met expectations, and the outlook is further clouded by the fact that the funds available from the International Monetary Fund [IMF] and EFSF/ESM [European Financial Stability Facility and European Stability Mechanism] are dwindling as a result of other bailouts. Of course, sovereign bond yields have been artificially driven down in the short run by politically motivated too optimistic assessments of debt sustainability in some eurozone member countries.

      What is more, downward pressure on bond yields has been exerted by the expectation of investors such as Blackrock, Goldman Sachs and a couple of hedge funds that the ECB will step in to buy sovereign bonds even if conditionality is not met by these countries. This cannot be called a healthy and sustainable thing. Thus, it seems fair to state that Europe is gradually running out of time and options.

      Already the now-terminated predecessor of the OMTs, the Securities Market Programme [SMP] has always been a controversial option, riddled with potential dangers. It is seen by many as a de facto fiscal transfer from the North to the South and, moreover, a transfer made without democratic consent.

      By showing willingness to buy the debt of poorly performing countries, the SMP was seen as reducing credible incentives for necessary long-term reforms. In addition, although the ECB tries to "sterilize" these transactions, this is far from an exact science, leaving a risk of higher money supply fuelling inflation in the medium to long run.

      An alternative manner which serves to lower yields might be to issue securitized government debt, for example, with gold reserves. This could achieve the same objectives as the ECB's bond purchases programs, but without the associated shortcomings. This would clearly raise legal issues, but then so too did the ESM, SMP and OMT.

      This would not work for all countries but would for some of those in most need. In fact, Italy and Portugal have gold reserves of 24% and 30% of their two-year funding requirements. Using a portion of those reserves as leveraged collateral would allow those countries to lower their costs of borrowing significantly.

  10. "Here come the pensions." The sweetest 4 words in a gold bull's vocabulary. Excellent post, Dave.

  11. Dave,

    On a much less serious note - Go Broncos! Prediction for this weekend?

    1. Ya. Ray Lewis' wife tastes like Honey Nut Cheerios...

      Weather is going to be brutal. Forecast is a high of 19 degrees.

      Denver wins 20-10. Look for me in the club seat section. If Denver is winning in the 4th quarter, I might take my down coat, Manning jersey and long undershirt off...

  12. Got a Monet or gold bar? Here’s a home loan

    Many institutions say demand is rising. J.P. Morgan Private Bank says the dollar amount of loans secured by clients’ assets for real-estate purposes increased 20% last year. At Wells Fargo Private Bank, about one-third of all the loans on its books are secured by clients’ liquid assets, such as investment accounts. Moreover, applications for these loans—used for a variety of purposes, including purchasing homes—are submitted daily. It also receives one to two requests per month for art loans, up from one to two a year in 2010. “There’s definitely been a surge of people using art as collateral for loans,” says Suzanne Gyorgy, global head at Citi Private Bank’s Art Advisory and Finance Group.

    Many lenders will accept other tangible assets as collateral as well. Tom Clarke, U.S. head of capital advisory at J.P. Morgan Private Bank, says this can include gold bars and private jets that clients own outright.

  13. Report commissioned by World Gold Council hints at the war against gold

    A report commissioned by the World Gold Council for the Official Monetary and Financial Institutions Forum in London, written by the chairman of the forum's advisory board, Meghnad Desai, more or less acknowledges what we've never seen the gold council acknowledge, the most important aspect of gold's place in the international financial system -- that is, that there is a war against gold.

    "Most crucial with respect to the role of gold," Desai writes in his introduction, "the previously dominant Western economies have attempted to dismantle the yellow metal's monetary role, and -- for a variety of reasons -- this has comprehensively failed."

    Presumably Desai says "Western economies" because to speak plainly -- to say "Western governments" or "Western central banks" -- would get a little too close to an impolitic truth about surreptitious policy. As Chesterton wrote a hundred years ago, "As is common in most modern discussions, the unmentionable thing is the pivot of the whole discussion."

  14. Excellent post, looking forward to the next bull run in Mining stocks. Its been long overdue, finanacial institiution are aware of the oversold precious metals. Its a matter of time they'll spread the word out.Bull cycle is long overdue, is right. Will 2013-14 be a start of a bull market for mining?