The Coming Flood of Mainstream Money into Gold
The Coming Flood of Mainstream Money into Gold
From Birch Gold Group
This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: The gold market is about to see a new wave of investors, the factors that could cement gold’s gains further down the line, and what a Biden presidential win would mean for gold.
Despite massive gains last month, many investors are still waiting to jump on board with gold
Seeking Alpha contributor John Rubino is among the many who have taken note of a deep shift when it comes to the institutional view of gold. Whereas money managers have previously taken a lukewarm approach to the metal, the elimination of bonds as a haven option caused funds to turn to gold to seek not just protection, but also a safe source of returns.
UBS Global Wealth Management’s regional chief investment officer Kelvin Tay voiced a price forecast of $2,000 before the end of the year, while Wells Fargo bought September’s dip and issued their own forecast for gold’s rise to $2,200-$2,300 by 2021.
With sentiment such as this, Rubino has taken a look at gold’s current availability and what the expected increase of just a few percent in terms of institutional demand could mean for gold prices. As Rubino points out, the sum total of gold’s above-ground reserves amounts to less than 1% of global investible capital. Yet even this figure translates to a massive $10 trillion at current prices according to most estimates.
In contrast, the combined capital of the equity, bonds and real estate markets reaches roughly $600 trillion. There is no shortage of analysts stating that institutions are likely to increase their portfolio allocation to gold from a previous 1%-2% to a new standard of 4%-5%, and that many absentees will come to treat the metal as a necessity. As Rubino notes, a mere 4% increase in gold demand would translate to $24 trillion more being poured into the precious metals market. Bullish as this sounds for prices, Rubino finds it to be not only a conservative forecast, but also one that will raise many questions when it comes to whether supply can meet even such a relatively modest rise in demand.
After reclaiming $1,900, gold faces no shortage of tailwinds to keep its momentum going
As Forbes contributor Frank Holmes points out, gold has been quick to jump at the first sign of dollar weakness, soaring above $1,900 after a four-day losing stretch for the greenback. With the metal coming close to reclaiming nearly all of this year’s gains, Holmes ponders what could be in store nextas the election draws closer and uncertainties linger.
Despite the glaring show of price strength, Holmes notes that this September was actually gold’s weakest from a percentage-gain standpoint since 2014. With many tailwinds waiting in the wings to send the metal flying even higher, Holmes believes that gold bugs should be reasonably excited. The key among these in the form of negative real rates, monetary stimulus and geopolitical uncertainty are already pushing gold forward and seem poised to stay in place.
To Holmes, there could be two additions to further bolster what looks to be the start of a historic run in the gold market. After doubling their gold demand to buy roughly 650 tons of gold in both 2018 and 2019, respectively, central banks have simmered down in their purchases and have since returned to their previous norm. Being one of the primary price drivers in the gold market, an expected intensification in terms of central bank bullion purchases, such as the one Citi is forecasting, would bring good news to the gold market.
The other big factor that Holmes has singled out has been the much talked-about inflation. After years of staying below 2%, the inflation rate is finally looking to pass the Federal Reserve’s desired target, while many are beginning to wonder whether the consumer price index (CPI) is really an accurate gauge and whether inflation could already be running much higher.
A Biden presidential victory would be highly bullish for gold
Expectations that the tumultuous presidential election would have a heavy impact on the markets appear to have materialized with nearly a month left to go. While some view President Trump’s anti-stimulus policy as bearish for gold, the metal currently sits above its 2011 high after a mild dip in August.
To Ole Hansen, head of commodity strategy at Saxo Bank, a win by Democratic candidate Joe Biden could very likely pave the way for another run towards $2,000 in short order. Biden’s rebuilding plan includes the promise of an additional $1.8 trillion of stimulus printed in the first 100 days of his presidency. Some have also noted that the environmentalist agenda that the nominee touts makes way for some bullish expectations for silver due to its industrial use.
Should such a stimulatory measure come to fruition, it would sit atop an unprecedented multi-trillion stimulus package that the Federal Reserve has issued thus far. The measures taken to reinvigorate the economy have played a key role in pushing gold to new heights, as they have brought inflationary expectations to a boiling point, together with the Fed pledging to keep interest rates near zero for several years to come.
Whichever candidate notches the victory, should the election indeed go without a hitch, investors don’t seem particularly dissuaded from gold. The new environment of negative real yields, zero interest rates and negative-yielding global bonds, along with the specter of inflation, has driven both individual and institutional investors to accumulate a record $111 million ounces of gold so far this year.