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Message: The Gold Bull Stage 2: Here Come The Pensions - Dave in Denver


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.
Posted byDave in Denverat10:30 AM
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