If you’re one of many investors considering investing in a gold ETF, you’re probably wondering how high gold can still move.
The truth is that nobody can predict how high (of low) gold prices will move. But we can ascertain the likelihood of capital inflows that might go into gold investment.
We know that the price of an asset tends to rise when investors pile into it. As for gold, investors are starting to buy more of it. Central banks have been buying more of it. But what about institutions?
The answer to that question is the indication that can help us determine how large an inflow of capital can go into the yellow metal.
A Small Industry Within a Large Sector
Despite the significant role that gold can play in times of economic uncertainty, the gold market itself is rather small compared to those of other financial assets.
Perhaps it’s because of its scarcity that gold holds such a significant position, unlike other dollar-denominated assets (as fiat can be printed, gold cannot).
Although central banks have been purchasing gold en masse since 2018–the largest gold buying we’ve seen since 1971–what we haven’t seen yet is high-volume institutional buying.
With only 2% of hedge fund portfolios holding physical gold, the rest–not only hedge funds but also mutual funds, investment banks, pension funds, wealth funds, and insurance companies–are all sitting on the side lines.
And once institutions within just one of these categories starts buying, others tend to follow (similar to what we saw among central banks).
This brings up a few key fundamental questions:
- How large of a capital inflow might we expect from these institutional buyers once gold demand ramps up?…and
- Considering the small size of the gold market, how will that volume of buying affect gold prices?
Here is what gold holdings and gold demand looked like in 2018 as compared with the AUM of some of the largest financial institutions in the US. Assets under management represent mostly what was not invested into gold.
As you can see, gold investment in 2018 was a mere pittance of an allocation in comparison with most other assets.
The Gold Investment bar looks non-existent, though it weighs in at $0.08 Trillion. This bar also represents the amount of new gold available for investment.
How Much Institutional Money Might Flow Into Gold?
When institutions start allocating a portion of their portfolios to gold, how much they decide to buy is up to each institution, of course.
But the minimum they need to buy for relevant gold exposure stands at 2%. That’s a general principle that most money managers follow. Anything less than 2% portfolio exposure is close to inconsequential.
So what does a 2% purchase look like in terms of volume? It’s rather quite large, surprisingly.
Take BlackRock. Their total AUM is slightly greater than $6.8 Trillion. If they allocated 2% of their AUM to gold, they would have to buy $136 Billion worth of gold.
Such a purchase would have wiped clean last year’s available supply of new investment gold–bullion, coins, and even exchange-traded funds (remember, that figure stood at $80 Billion only).
Bear in mind that BlackRock is just one large institution within a segment of the entire financial sector.
What if other institutions–specifically, the largest of each category–jumped in with a 2% minimum allocation?
- The largest Mutual Funds collectively hold $50 Trillion AUM–a 2% gold purchase would amount to $1 Trillion.
- The largest Pension Funds hold $44 Trillion AUM–a 2% gold purchase would amount to $880 Billion.
- The largest Investment Banks hold over $17 Trillion AUM–a 2% gold purchase would amount to $350 Billion.
- The largest Life Insurance companies and Sovereign Wealth funds hold around $8 Trillion AUM each–a 2% gold purchase would amount to $320 Billion.
- The largest Hedge Funds collectively hold around $3 Trillion AUM–a 2% gold purchase would amount to $60 Billion.
- And finally, the largest Private Equity funds hold $2 Trillion AUM–a 2% gold purchase would amount to $40 Billion.
That’s a colossal amount of potential cash going into gold at a 2% allocation. How much gold is there to satisfy institutional demand? How much might this level of demand–a mere 2% allocation–bid up gold prices if at all?
The Bottom Line
If you’re thinking about adding gold to your portfolio as a hedge or for capital appreciation, this is just another fundamental factor to consider when deciding whether the metal is suited for your financial goals.
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