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Is The Gold Trade Crowded?




This is a guest post by Jeff Clark, Senior Editor, Casey’s Gold & Resource Report:

It’s true that GLD’s assets just passed the $50 billion mark, and that it’s the second largest U.S. ETF. Yes, mints had difficulty filling orders when the Greek crisis broke. And yes, the gold price is up nine years in a row.

But those who look at statistics like these are missing the other side of the equation. I think it’s less about how much money is already invested in gold and more about what’s available to invest. After all, one could be impressed that China, for example, invested $14.6 billion in gold over the past few years – until you realize they have $2.45 trillion sitting in reserves.

So, how much is invested in gold, and how much is available?

gold etf vs money market assets Jul 2010

According to hedge fund Paulson & Co, if you added up all the money invested in gold ETFs, it would total $78.3 billion (at $1,200 gold). The amount of money currently sitting in U.S. money market funds, on the other hand, comes to $2.849 trillion.

In other words, all the money invested in gold ETFs represents just 2.7% of what is sitting in cash. Put another way, if just 5% of available money market funds ($142.4 billion) were to move into the gold ETFs, it would almost triple the current value.

But what if it’s 10%? And what if Doug Casey’s call for a modern-day gold rush comes to pass?

Those who claim the gold market is crowded will also point to Paulson’s extraordinary high percentage of funds sitting in yellow metal investments. Yes, he’s got a $3.4 billion stake in GLD – but the critics didn’t look under the hood. Most of those holdings are from the fund’s employees (including John himself), not outside investors. Not exactly an overheated trade.

To some, the amount of money invested in gold may “feel” high, but it’s a relative pittance compared to what’s sitting idly on the sidelines, waiting for a reason to move and a place to go. And when you consider that the vast majority of U.S. citizens don’t own any form of gold, this is a market that is the opposite of crowded. There is a lot of money that could hit our sector.

And it’s not just precious metal funds. I interviewed Andy Schectman of bullion dealer Miles Franklin, and Kevin Brekke, our Switzerland-based editor, told me it was the most informative interview we’ve published this year. Why? Because based on what Andy sees week after week regarding supply, he’s come to the conclusion that we’ll see a serious drought of bullion when the average citizen begins to buy gold. Meaning, if you wait to buy until everyone else does, you may find yourself out of luck. And the data I present this month backs up that claim; in fact, you may be surprised at some of the findings.

If you’re not a subscriber to Casey’s Gold & Resource Report, you may want to pony up the $39 to check out the current issue. Not only does it contain Andy’s insightful – and scary – interview, but I’ve arranged for huge discounts on the premiums of two bullion coins. The amount of money you’ll save from buying one of each coin is more than the cost of a one-year subscription. And you can’t get these prices anywhere else.

We’re "Calling All Gold Virgins” in the July issue. So if you don’t own any gold, or don’t have enough, well, I’ve made it very easy for you to lose your virginity. Click here to sign up for a risk-free 3-month trial.

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3 Responses to “Is The Gold Trade Crowded?”  

  1. 1 Stan

    If I am not mistaken (please check me on this) the amount of gold in existence is about 0.7 troy ounces / person worldwide, i.e. about $840 per person at $1200/oz. If that represents the monetary world wealth, it sure does not amount to much. Can any monetary system be based on such a diminutive number?

  2. 2 Babak

    Stan, the fiat monetary system has no bearing on how much of anything is in existence - it just relies on the fact that you or I both agree to use the currency as a store of value/exchange. It is only worth what everyone agrees it is worth.

  3. 3 Rafael Rosa

    Jeff,

    I believe your connection of money-hanging-out and gold ETFs going up (or gold in general) has a big disconnect.

    If I was to follow your logic, than I could put a graph of U.S. money market funds (or any other large cash asset) vs. silver, or US small caps stocks, or corn, or my own $10 fund, and say that there is a lot of money sitting out there that could come in, followed by a prediction that the designed asset will increase in price.

    Also, citing Chinese "reserves" is misleading. It's not like they can just sell that without any consequences. If they were to dump US treasuries, a major crisis (financial, political, and military) would likely occur. Even if gold did go through the roof, the average investor would likely never see the yellow in front of them, considering the amount of paper gold traded is many times larger the avaiable quantity of gold.

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