Despite gold
blasting higher this month, this metal remains deeply out of favor
among investors. They have shunned it for years thanks to extreme
central-bank money printing levitating stock markets. This slayed
demand for alternative investments, led by gold. But the resulting
radical underinvestment in gold today is super-bullish. Vast
capital inflows will be necessary to return gold investment to
normal levels.
It?s impossible to
overstate just how much gold is hated these days. Investors?
opinions on it range from total apathy to fervently believing gold
is the worst investment on Earth. You can easily test this out in
your own social circles. The next time the markets or investing
come up, ask if gold is now a good buy. Everyone will say no,
usually emphatically. And if you advocate for gold, they?ll think
you?re naive or stupid.
This extreme gold
antipathy is the natural consequence of this metal?s terrible price
action in recent years. Between August 2011 and August 2015, gold
lost 42.8% in a brutal secular bear market. Over that same span,
the flagship S&P 500 stock index soared 86.8% largely thanks to the
Federal Reserve?s epic QE3 debt-monetization campaign. And this
recent history of gold getting slaughtered is all most traders
remember.
But like all
markets, gold is forever cyclical and never moves in one
direction forever. Bear markets are inevitably followed by bull
markets. And those mighty bull markets are always born in the
darkest depths of despair when gold looks hopeless. The last time
gold suffered from universal disdain similar to today?s was in the
early 2000s. And that very extreme bearishness sowed the seeds for
an enormous bull.
Between April 2001
and August 2011, gold skyrocketed 638.2% higher! It was the
best-performing asset class over that decade, obliterating the S&P
500?s dismal 1.9% loss over that span. It is utterly amazing that
investors have forgotten in recent years how incredible gold bulls
are for multiplying wealth. And the time to buy low is after a
long bear when prices are low and everyone believes they will
stay that way forever.
This latest gold
bear was totally artificial, conjured by the Federal Reserve?s
extreme market
distortions. Back in early 2013, the Fed ramped up its
wildly-unprecedented open-ended third quantitative-easing
campaign. Since QE3 had no predetermined size or end date like QE1
and QE2, it had a vastly greater impact on stock-market psychology.
Traders came to believe the Fed was effectively backstopping
stock markets.
Every time the
stock markets threatened to slide in a normal healthy selloff, the
FOMC itself or top Fed officials would jawbone about their
willingness to ramp the
extreme QE3 money
printing if necessary to arrest the selling. So traders
aggressively bought on this incredible Fed dovishness, ignoring
normal indicators of overextended, overbought, and overvalued stock
markets. The Fed
levitated the stock markets!
Their massive
Fed-fueled rally dwarfed everything else, with stocks? performance
sucking vast amounts of capital out of other assets including gold.
Traders love to buy winners and chase rallying markets, so
everything else withered. This ultimately led to today?s radical
underinvestment in gold, with capital in this asset class far
below normal levels. Like all market extremes, this one will
inevitably mean revert too.
As gold is an
opaque global market, there?s no way to directly measure total gold
investment. Since gold enjoys inherent intrinsic value, and is
physical and private, it can?t be tracked at the investor level.
But gold investment can be inferred through a variety of metrics
including national imports and exports. Of particular interest
today is American investors? level of gold investment, since
they control such vast capital.
While American
contrarian investors still prefer owning physical bullion coins
in their own possession for a variety of excellent reasons,
mainstream investors have gravitated towards a new vehicle.
When they want gold exposure in their portfolios, they turn to the
flagship GLD SPDR Gold Shares gold ETF. It is the world?s largest
gold ETF by far, and utterly dominates American stock investors?
gold holdings.
GLD offers many
advantages that really appeal to mainstream investors. It is a
super-cheap way to get gold exposure, with a trivial 0.4% annual
expense ratio about an order of magnitude smaller than the
commissions on traditional coin purchases. And investors can buy or
sell gold instantly via GLD, which holds the underlying physical
gold bullion in trust for its shareholders. GLD is the most
efficient way to own gold.
This is especially
true for large investors like pension funds, mutual funds, and hedge
funds. It?s just too impractical and expensive for them to deploy
large amounts of capital in physical bars or coins. Not only would
they have to worry about high commissions, but transfer, storage,
and ongoing security. So the birth of GLD in November 2004
effectively opened up large gold investment to the entire fund
industry.
GLD is incredibly
transparent, publishing a comprehensive list of every single gold
bar it holds in trust for its shareholders every day. The
latest list this week was a whopping 1102 pages long! By studying
the value of GLD?s gold bullion over longer periods of time, we can
gain priceless insights into the levels of gold investment by large
American investors. And these days they remain radically
underinvested in gold.
This first chart
looks at the value of GLD?s holdings, a great proxy for gold
investment among American stock traders, superimposed over gold. It
is simply computed by multiplying GLD?s daily holdings by the price
of gold. And thanks to the combination of recent years? gold bear
along with the
epic mass exodus from GLD by stock traders spawned by the Fed?s
stock-market levitation, GLD investment is
now super-low.
As of the middle
of this week, the total amount of capital American stock traders had
deployed in gold via GLD was just $26.5b. Despite gold?s sharp
October rally, that wasn?t far above the major secular 6.5-year low
of stock-market gold investment of $23.3b in early August. The last
time gold investment was that low was in January 2009 when gold was
trading near $855. This is what radical gold underinvestment
looks like.
While $25b is a
lot of money, it is vanishingly small in the grand scheme of
investors? capital. As of the end of September, fully 169 of the
500 companies in the S&P 500 had market capitalizations over $25b.
The collective market capitalization of all 500 of those companies
in that index was $17,581b. So $25b in gold via GLD is practically
nothing, literally a rounding error. American investors really have
shunned gold.
Stock traders?
incredibly-low levels of gold exposure today are best understood
through the context of the history of GLD holdings? value. The
extreme weakness plaguing gold in recent years started in early 2013
as the Fed ramped up its unprecedented QE3 campaign. And 2008 of
course saw that once-in-a-century stock panic that spooked the
central banks into their current mode of extreme interventionism.
So the last normal
years sandwiched between the stock panic and extreme central-bank
distortions in the global markets ran from 2009 to 2012. During
that span, the total value of the physical gold bullion GLD held in
trust for its shareholders averaged $53.7b. That?s a little over
double today?s levels of gold investment! So even a simple mean
reversion would require massive stock-market-capital inflows into
gold.
This will happen
naturally as gold itself continues mean reverting higher out of this
past summer?s totally-artificial lows driven by an
extreme
gold-futures shorting attack. The more gold rallies, the more
investors will want to own it. Nothing begets buying throughout the
entire markets like rising prices. So they will migrate
capital back into GLD, which is already accelerating this week.
Investors just love to buy a winner.
And GLD itself is
actually a conduit for stock-market capital to flow directly into
the global physical gold market. GLD?s mission is to track the gold
price, and this is only achievable if this ETF can vent any excess
buying or selling pressure on its shares directly into gold itself.
If this flow-through mechanism didn?t work, GLD?s price would
quickly decouple from gold?s due to their separate supplies and
demands.
When investors buy
GLD shares faster than gold itself is being bought, GLD?s price will
accelerate away from gold to the upside. In order to stop GLD
shares from failing to mirror gold, GLD?s managers have to sop up
that excess demand. So they issue enough brand-new GLD shares to
satisfy and offset it. Then they use the proceeds from these
GLD-share sales to directly buy physical gold bars to add to
GLD?s holdings.
So as gold rallies
and investors return, the amount of capital invested in GLD will
rise through both the gold price appreciation and the growth of
GLD?s bullion held in trust for shareholders. Thus it?s not going
to take $27b of capital inflows to return American stock traders?
gold investment to normal levels again. Let?s conservatively assume
that half of the increase in GLD?s value will come from direct
capital inflows.
We are still
talking about $13b+ of new GLD investment, which is big money in the
gold market! There?s no doubt that such huge collective GLD-share
buying would force the gold price much higher. All this excess
differential demand would have to be directly shunted into gold
itself, so GLD?s gold-bar buying would directly bid up global gold
prices. Today?s radical gold underinvestment
guarantees big future buying!
But there?s a
superior way to measure American stock investors? gold exposure than
just using the value of GLD?s holdings. It?s looking at GLD?s
holdings relative to the collective market capitalization of the
elite S&P 500 component companies? stocks. I?ve been alluding to
this measure for years, but finally got around to building the huge
spreadsheets containing the staggering data necessary to build this
chart.
Every month-end at
Zeal, we gather data on all 500 S&P 500 companies to compute the
general-stock-market valuations. We?ve long weighted individual
price-to-earnings ratios of each company by their market
capitalizations, so small companies with outsized P/Es don?t have
undue influence in skewing the overall average. And part of this
involved over 15 years of calculating the entire S&P 500?s market
cap.
To get an idea of
American stock investors? total portfolio exposure to gold, we can
divide the value of GLD?s holdings by the S&P 500 components?
aggregate market capitalization. This is an outstanding proxy of
the percentage of their portfolios invested in gold. Here?s
this chart I?ve been procrastinating on for years because it was so
tedious to create. This ratio is superimposed over GLD?s actual
holdings in metric tons.
It took about 100k
pieces of data to build this chart, and the results are
super-bullish for gold investment demand going forward. Per the
proxy of looking at the value of GLD?s holdings compared to the
total market cap of the S&P 500 companies, American stock investors?
portfolio exposure to gold right now is around just 0.14%! That?s
not a typo, we are talking about 1/7th of a single percentage
point here, nothing.
Thanks to that
extreme
gold-futures shorting attack back in July, this ratio of the
values of GLD to the S&P 500 fell as low as 0.12% in early August.
That happened to be a major secular 7.7-year low in this measure of
gold investment. Once again like all extremes, this one isn?t
sustainable. Gold can?t and won?t stay loathed forever, and as it
mean reverts higher out of these lows investors will start
returning.
And reasonable
normal levels of GLD investment are far higher than today?s
dismal lows. Once again in those last normal years between 2008?s
stock panic and the early-2013 dawn of the Fed?s
incredibly-manipulative QE3 campaign, 2009 to 2012, American stock
investors? portfolio exposure to gold via GLD averaged near 0.48%.
That long 4-year secular span is a rock-solid baseline, not a
fleeting gold-euphoria moment.
In order to merely
mean revert back to that normal-year average, not even overshoot,
this ratio would have to soar 3.4x from current levels! That
means a lot of stock-trader capital flowing into GLD, a lot of
gold-price appreciation, and probably plenty of
general
stock-market selling thrown in to boot. Again using that
normal-year average span between 2009 to 2012, we can get a decent
idea of how much of each.
After GLD?s
holdings grew rapidly in its early years as stock traders warmed to
the concept of a gold ETF, and then experienced explosive growth
just after 2008?s stock panic as hedge-fund managers flooded into
cheap gold, GLD?s holdings hit a mature stage in early 2009. They
had finally reached an equilibrium where they could keep gradually
growing on balance, but were too large for more fast growth.
During that
4-normal-year span before QE3?s gross distortions, GLD?s gold
bullion held in trust for its shareholders averaged 1208.5t. As of
this week, its holdings languished way down at 694.9t which wasn?t
far above their major 6.9-year secular low of early August. So a
normalization in GLD?s holdings to pre-QE3 levels would require
enough differential buying pressure on GLD?s shares to necessitate
513.6t of gold buying!
That?s an
incredible amount of gold that would catapult GLD?s holdings nearly
75% above today?s low levels. I don?t know how long this full mean
reversion would take, but let?s conservatively assume a couple
years. That would equate to GLD bullion buying of 21.4t a month
over that span. That would be a big boost to global gold investment
demand, which ran at 75.7t per month in the first half of 2015 per
the WGC.
So we are talking
about a 28% boost in worldwide gold investment demand for a
couple years as American stock investors reallocate capital to GLD
to reverse their radical gold underinvestment. The amount of
capital necessary to fuel this is vast by gold standards, but still
small by stock-market ones. Between 2009 and 2012, the gold price
averaged $1361. The midpoint between here and there is near $1275.
Buying the 513.6t
of gold bullion necessary to mean revert GLD?s holdings back to
normal would cost about $21b at $1275 gold. And $21b in
differential new inflows to GLD from American stock investors would
work wonders for gold?s price, bidding it much higher. The sheer
capital shift necessary to fully unwind today?s radical gold
underinvestment is super-bullish for gold price levels in the coming
years.
And stepping back,
seeing a 0.5% portfolio allocation in gold again by American stock
investors certainly isn?t a stretch at all. Remember the average
ratio of GLD holdings? value to the S&P 500 collective market
capitalization was 0.48% for 4 years between 2009 to 2012.
At its height in August 2011 as gold soared to a euphoric,
overbought peak,
this ratio challenged 0.69%. And 0.5% still remains very low
historically too.
For centuries it
not millennia, prudent investors have advocated having at least
5% of total portfolios invested in gold. That?s 10x the
conservative target for this coming mean reversion! Gold is a
unique portfolio diversifier that generally moves contrary to
stock markets. It acts as essential portfolio insurance
against some massive selloff hammering the other 95% of portfolios.
Literally every investor should own gold!
And there?s no
doubt many more will in the coming years. Everything that?s
happened since 2013 in the markets is a central-bank-conjured
fiction, a fantastic illusion from zero interest rates and extreme
QE money printing. The vast resulting distortions artificially
boosted stocks while sucking great amounts of capital out of other
investments including gold. Neither extreme of high stocks or low
gold is sustainable.
As the Fed?s
extraordinary stock-market levitation inevitably rolls over into
a new cyclical
bear, investors will seek out alternatives again. Since gold
tends to thrive in weak stock markets and
rallies during
bear markets, it will again become a prime destination for
countless investors. So not only is that very conservative 0.5%
stock-investor portfolio allocation to gold easily doable, that
metric will probably go much higher.
And don?t make the
mistake American futures speculators are of fearing the Fed?s coming
rate hikes. Historically gold has actually
thrived on balance
in Fed-rate-hike cycles, primarily because they wreak so much havoc
on general stocks and bonds. Gold actually rallied through 6 of the
11 Fed-rate-hike cycles since 1971, with average gains of a
staggering 61.0% within those exact rate-hike-cycle spans!
During the Fed?s
last rate-hike cycle between June 2004 to June 2006 where it more
than quintupled its federal-funds rate from 1.00% to 5.25%, gold
soared 49.6% higher! That was despite 425 basis points of hikes
across 17 consecutive FOMC meetings. Gold only fell in
Fed-rate-hike cycles when they began when gold was near secular
highs, for an average of just 13.9%. That obviously certainly isn?t
the case today.
So don?t hesitate
to heavily invest in gold now before the legions of American stock
investors figure out they are radically underinvested. Their vast
buying will catapult gold much higher. Either physical gold bullion
or GLD shares are fine, but I far prefer the beaten-down stocks of
the gold miners. They?ve been forced to
fundamentally-absurd lows in recent years, and have big
potential to at
least quadruple in the next few!
And that?s why you
need us at Zeal. We?ve long specialized in this obscure contrarian
sector that most mainstream investors ignore, despite gold stocks
multiplying wealth by nearly 18x in the 2000s! We?ve long published
acclaimed weekly
and monthly
newsletters for contrarian speculators and investors. They draw on
our decades of exceptional experience, knowledge, and wisdom to
explain what?s going on in the markets, why, and how to trade them
with specific stocks. That?s proved very profitable.
Since 2001, all
700 stock trades recommended in our newsletters have averaged
annualized realized gains of +21.3%. And we currently have a couple
dozen new gold-stock and silver-stock trades on our books just
purchased in recent months as gold stocks languished at ridiculous
levels due to irrational hyper-bearish sentiment. They already have
unrealized gains of up to 56%, and this
major new
gold-stock upleg is just getting started. Don?t procrastinate
any longer, subscribe
today and get invested!
The bottom line is
American investors remain radically underinvested in gold. This is
readily evident in the ratio of the value of GLD?s gold-bullion
holdings to the collective market capitalization of the elite S&P
500 stocks. Portfolio allocations to gold were recently at their
lowest levels in nearly 8 years, and remain at well under a third of
recent years? average levels before the Fed?s wild distortions from
QE3.
That means
American investors are going to soon plow tens of billions of
dollars back into gold in an attempt to regain some modicum of
prudent portfolio diversification. While these capital flows will
be small compared to the stock markets, they are massive relative to
gold investment demand. All that buying is going to catapult gold
prices far higher, leading to gargantuan gains in the left-for-dead
gold miners? stocks.
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