Gold Prices Setting Up for Reward Thanks to Stocks and Bonds

GoldPricesSettingUpGold Prices Down, Opportunity Remains

Year-to-date, gold prices are down roughly 4.5%. This shouldn’t bother investors whatsoever. The precious metal continues to present a great opportunity.

Here’s what must be understood; gold can act as a transition asset at times. In other words; when there’s uncertainty in other asset classes, investors tend to move towards gold.

As it stands, assets like stocks and bonds are facing severe headwinds. This can only be great for the precious metal.

Stock Market Sliding Lower; Investors to Rush Towards Gold?

Right now, there’s a massive exodus from stocks. From their highs in May, key stock indices like the Dow Jones Industrial Average are down over 10%.

To give you an idea about how fast investors are ditching stocks, consider the figures from the Investment Company Institute. In the first seven months of 2015, the long-term U.S. stock mutual funds have witnessed outflows of close to $81.0 billion. If you look at the weekly statistics for August, and until September 16th, these mutual funds have seen outflows of another $28.7 billion. (Source: Investment Company Institute, last accessed September 29, 2015.)

This isn’t all. When we look at how institutional investors are reacting, they are not too optimistic on stocks either. Just look at the chart below of the National Association of Active Investment Managers Exposure Index. This index essentially tracks the percentage of stocks active money managers hold in their portfolio.

NAAIM_Exposure_Ind_Chart

Chart courtesy of www.StockCharts.com

In early 2015, active money managers’ portfolios consisted of 100% stocks. Now, it’s close to 20%. This 80% decline in their stock holding shouldn’t be overlooked.

Gold investors should be questioning where all this money will go. Could investors be running towards gold after they ditch their stocks?

$39.0 Trillion Bond Market Getting Nervous

When you look at the bond markets, they are becoming a scary place to be.

Know this; interest rates in the U.S. economy are about to go higher. The Federal Reserve has been persistent about raising rates sometime this year. It didn’t do so in September, but we hear a significant amount of noise that suggests that the Fed will raise rates in December.

With this, one must also know that higher interest rates are bonds’ biggest enemy.

Bringing in some perspective; as of the second quarter of 2015, $39.49 trillion worth of U.S. bonds were outstanding. This figure includes government bonds, asset backed securities, corporate debt, and others. (Source: Securities Industry and Financial Markets Association, last accessed September 29, 2015.)

You see, the last few years’ bond markets have become overcrowded. Between 2008 and the second quarter of 2015, the amount of U.S. bonds has increased by $6.3 trillion.

When interest rates go up, there will be nervousness in this $39.0 trillion market. With this, it’s logical to question where the money could go. Stocks aren’t the place; they have been declining. Don’t be shocked if bond investors seek shelter in gold.

Why Gold Prices Could Surge

Dear reader, it is critical to understand that the gold market is fairly small compared to the stock market and the bonds market. You don’t really need all the money from bonds and stocks going into gold—just a small percentage of it could really cause gold prices to surge in a very short period.

I continue to watch mining companies closely—those with solid properties and lower production prices. If gold prices rise by even 20% from the current levels, it will not be surprising to see their stock price double in value.