Institutional Investors are a group that you may not think about much. The larger ones can be incredibly significant where investing is concerned. These pension funds and sovereign wealth funds have billions of dollars to invest. Because of this, they have to choose their investments and markets carefully or they will literally move the prices higher as they buy. It is important to understand the predicament these massive investors are facing lately as they are likely coming to the gold markets before long.
Major Institutional Investors Have Few Viable Investment Choices
The bigger institutional investors have their favorite markets. They like sovereign government bonds. The problem with these lately is that an enormous number of them are providing negative yields. A shocking $13 trillion of these bonds come with sub zero yields. Many of them are issued by governments that have high debt to to GDP ratios. This includes countries like Japan whose government finances are shaky and which have not experienced meaningful growth in years.
Major institutional investors also tend to favor stocks. The sovereign wealth fund of Norway alone owns 5% of all stock securities in the world. The problem with these investments is that many stock markets throughout the globe are trading at or near their all time high levels. This is the case even though the profits of many corporations have proven to be in long term decline. Even putting money into bank accounts provides negative interest rates in a significant and increasing number of nations. This means that you or the institutional investor must pay the bank to hold your money for you.
Institutional Investors Need Larger Markets to Deploy Capital
The fact is that the larger institutional investors possess significantly fewer investment choices than do retail investors. Outfits with $100 billion or more to invest need huge markets to put their capital to work in successfully. Groups with hundreds of billions simply can not buy smaller real estate holdings like houses, apartments, or even commercial buildings. Senior investment managers at sovereign wealth funds have said stated that they can not even contemplate investment deals that do not start at a billion dollars or higher.
This pushes these investors into those favorite few markets mentioned above. The U.S. Treasuries markets are an incredible $19 trillion. Billion dollar investments can move in and out of this government market with ease. Stocks are the same. The enormous public companies like Apple, Vodafone, IBM, and Wal Mart have hundreds of billions of dollars in market capitalization. The problem with these markets is that they are already trading at or near major or even all time highs. Government bond yields are paying their lowest amounts in history in many countries (and many are now negative). Stocks continue to trade at all time highs even though the underlying profits are declining.
A number of the institutional and sovereign wealth funds from Europe and around the globe have turned to the United States’ market believing that this is their safe haven from troubled countries in Europe and the Brexit worries. They are doing this when the U.S. dollar is at highs not seen in multiple decades. Stocks and bonds in the country are also trading at record levels. The major institutional investors do not like to purchase assets that are trading at these historic levels if they can help it. They are taking on significant risks in doing so. Markets may pull back on them, and the U.S. dollar may correct back down.
Gold is A Large Enough Market and Not At All Time Highs
This is where gold comes into the picture. You may not be aware of how large the gold market is. The World Gold Council estimates it to be over $7 trillion. This may not be the largest market on earth, but it is significant enough to absorb billions of dollars. Central banks have proven this is the case as they grabbed literally hundreds of tons in gold over the past several years. Just last year, China purchased tens of billions of dollars in gold.
Gold has a substantial advantage over bonds and stocks. It does not trade anywhere close to its record highs, especially when measured in U.S. dollars. Gold can rise to $1,900 per ounce before it runs up against this level. This means it has over 40% to go higher before it would smash through this dollar price per ounce. While gold has appreciated significantly this year, it is still relatively inexpensive when measured against recent historical prices. This makes gold more or less the one substantial asset type which is not approaching record highs that is still significant enough for the major institutional investors to buy. As sovereign debt piles only increase and central banks continue to print more money gold should draw in more of the major funds which are desperately searching for places to park their investment dollars.
Gold makes sense for you for similar reasons. It is the only true global asset that is extremely liquid and gains in value as central banks and governments lose control. This is why it should have a place in every investment and retirement portfolio.
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