Why Ever Gold
By GCRU Gold News on Sunday, November 1 2015, 22:22 - Permalink
Why Ever Gold?
Few assets command more disparate investment motivations than gold. Most investors hold opinions of gold’s merits, usually with surprising conviction. At Sprott, we view the gold thesis as more comprehensive, compelling and complex than reflexive motivations commonly ascribed to gold investors in financial media. By way of example, one unique facet of gold’s investment utility is the capability to allocate accumulated wealth, at a moment’s notice, safely outside what may be perceived as a shaky financial system. Sometimes it makes sense to allocate capital to gold, sometimes gold’s investment merits are less compelling. This does not mean gold is a permanent investment obligation. While we are as intolerant of tone-deaf, gold-bug logic as anyone, we do view the current environment of heightened monetary instability as a classic juncture at which gold plays a productive portfolio-diversifying role.
The vast majority of market participants, especially in advanced equity bull markets, will always be hesitant to embrace gold as a relevant portfolio asset. Why own gold instead of the world’s leading corporations, replete with inherent prospects for capital formation, returns on equity and cash flows? Of course, this is how it should be—global capital markets offer enormous promise and opportunity. However, to some investors, almost always in the minority, gold offers attractive protection from financial assets when their quoted prices are perceived as detached from intrinsic value, or, even more importantly, when the integrity of the unit of account in which their prices are quoted (fiat currencies) becomes increasingly suspect. In our experience, the logic of a portfolio allocation to gold is most easily understood by true owners of significant wealth. Those who have personally accumulated capital are always most sensitive to potential risks of its dissipation. Further, owners of true wealth are less prone to being unsettled by gold’s implications, so threatening to many.
Why Gold Now?
During the past 15 years, gold has posted consistent annual advances when measured in the world’s prominent fiat currencies. Indeed, even including 2015 year-to-date, the average gold performance as measured in nine global currencies has only been negative during one calendar year since 2000—declining an average of 24.39% during 2013. Given the wide range of global monetary and economic conditions prevailing during the past decade-and-a-half, we attribute gold’s methodical advance to persistent migration of a tiny portion of global wealth from the enormous stock of global financial assets to the comparatively limited stock of investable gold. Global financial assets now approximate $280 trillion, and we calculate the investable stock of gold to be in the vicinity of $2.4 trillion (mined gold minus jewelry minus central banks).
As we have discussed, the four macro assumptions which have blunted Western investment demand for gold in recent years are fading rapidly. We are confident that expectations for protracted U.S. dollar strength, significant Fed tightening, escape velocity U.S. economic performance and further increases in U.S. equities have all been integral in shaping current investment allocations among the world’s $280 trillion stock of financial assets. As these macro assumptions are recalibrated, we would suggest imminently and perhaps even simultaneously, we anticipate sharp resumption of Western investment demand for precious metals.
During the past 15 years, gold has performed quite well at various junctures when faith in U.S. financial assets has been challenged. Because both valuations and the aggregate stock of U.S. financial assets have only become more extreme in recent years, any incremental migration towards the gold complex should produce price movements at least on par with prior experience this decade. Specifically, a one-half-of-one-percent allocation from the current global financial asset pile towards gold would equate to 60% of the available gold stock, leading to significant price appreciation in the gold complex.