Monday, April 18, 2011

Gold and silver are under-owned by retirement funds

As of December 31, 2010, retirement asset values had climbed to $17.5 trillion.  <Click here>

As of April 15, 2011, there were a total of 11,083,478 troy ounces of gold bullion in the COMEX warehouse and depository, of which 2,354,041 ounces were registered, and 8,729,437 ounces were eligible for delivery.

As of April 15, 2011, there were a total of 102,820,120 troy ounces of silver bullion in the COMEX warehouse and depository, of which 41,039,056 ounces were registered, and  61,781,064 ounces were eligible for delivery.

Scroll down to the bottom of this NYMEX Daily Reports page, and click on Gold Stocks and Silver Stocks, respectively to verify the numbers:

As anyone with a pulse knows by now, the University of Texas endowment fund announced they took delivery on $1 billion worth of gold bullion, representing approximately 5% of assets under management (total asset value of $19.9 billion). <click here>

I've posited this will open the floodgates for pensions, endowments, and other institutional fund managers to diversify some of their assets into gold and silver to provide protection against a debased USDollar.

5% of $17.5 trillion is $875 billion.

COMEX gold inventory is 11,083,478 oz. X $1490/oz. = $16.5 billion approximately.

COMEX silver inventory is 102,820,120 oz. X $43/oz. = $4.4 billion approximately.

Hence, if retirement funds allocate just 5% of their assets to gold and silver, their total purchasing power is $875 billion.  Those funds will be chasing assets that are now only worth $20.9 billion (at today's prices).  Hot money will pile into asset classes that are scarce.  Surely, something has to give, and when there are more dollars chasing fewer gold and silver bars, this can only mean one thing for the prices of both gold, and especially silver.

Of course, many reputable, conservative money managers recommend up to 10% ownership in the precious metals sector, at which point the purchasing power of the retirement funds is now $1.75 trillion.  In order to solve that equation, $20 billion has to appreciate to $1,750 billion, while inventories are not rising (mining output for gold is increasing a minuscule 1.3% annually, while supplies for silver are plunging due to surging industrial and investment demand).

Does this imply that gold and silver prices have to appreciate 100-fold to satisfy demand?  Perhaps not, but it definitely refutes the notion that gold and silver at current prices ($1490 for gold and $43 for silver) are too richly valued.  Do not confuse price with value.

See disclaimers in the side bar.

Disclosure:  long precious metals equities.

No comments:

Post a Comment