Sovereign Wealth Funds Could Cause Super Spike in Gold Prices
There’s one class of investors that’s not so active in the gold market yet. If it decides to buy the yellow metal, we could see skyrocketing gold prices. These investors could send gold prices soaring to $5,000 an ounce.
I’m talking about sovereign wealth funds. Essentially, these are government-owned investment funds.
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Over the years, they have increased in number, and they now have a significant amount of buying power.
Consider this: according to the World Gold Council, between 2000 and 2010, 36 new sovereign wealth funds were created. Altogether, they manage assets worth roughly $7.38 trillion. (Source: “Enhancing the wealth of nations: Gold and sovereign wealth funds,” World Gold Council, last accessed November 2, 2017.)
Digging a little deeper, you’ll see that the sovereign wealth funds are similar to central banks. They are usually risk-averse in nature and tend to work on a long-term basis. Sovereign funds are not speculators; they are not looking for quick trades.
With this in mind, could gold become useful to them? Yes, if you look at historical returns, gold has provided sustainable returns. Also, the yellow precious metal acts as a preservation of wealth in times of crisis, so they could be thinking about buying the metal.
What Could Happen if Sovereign Funds Buy Gold?
If we do a simple extrapolation here, assuming that sovereign wealth funds allocated 10% of their portfolios to gold, this could result in major inflows to the gold market.
Consider that 10% of $7.38 trillion amounts to $738.0 billion.
If this sort of money were to go into the gold market, it would cause an instant spike in gold prices. A $5,000 gold price becomes a possible scenario in this case.
Understand that the gold market is fairly small compared to the stock market or the bonds market. $738.0 billion would go a long way.
Global gold mine production is around 3,000 metric tons, which is around 96.5 million ounces. If you buy the entire mine production, at current gold prices, it would cost around $122.5 billion. So, with $738.0 billion, sovereign wealth funds would have to buy multiple years of mine supply.
Mind you, you have to keep other gold buyers in the markets as well. If sovereign funds step in, it could cause a massive shortage of gold in the market.
Gold Prices Outlook: Precious Metal Could Spike, Mining Stocks Could Make Millionaires
Dear reader, sovereign wealth funds don’t get much attention usually, but they buy a lot of assets like stocks, bonds, and currency.
Since the financial crisis, central banks have become net buyers of gold. They are buying the yellow precious metal because they see it as a way to reduce volatility in their portfolios. It has to be questioned whether the sovereign funds are going to follow in their footsteps. It is possible.
Obviously, with time, we will know more. But it wouldn’t be shocking to see them buy gold eventually. Here’s what I will also say: when and if we start hearing about sovereign funds buying gold, it may be too late.
In the midst of all this, I continue to closely follow gold mining companies. This statement may sound very bold, but it’s worth making: mining stocks could be the next “millionaire makers” as gold prices rise. These stocks are trading at rock-bottom prices—for pennies on the dollar.
