The worldwide collapse in government and corporate bond prices could result in gold prices rising substantially in the years ahead.
The yields on long-term bonds currently sit at the lowest level since the 1950s. Here’s the kicker: they could go lower. Why? Thanks to central banks around the world, lower interest rates and even negative interest rates could be the future for a long, long time.
To see just how severe the drop in bond prices has been, please look at this long-term chart of the bellwether 30-year U.S. bond yield:
Chart courtesy of www.StockCharts.com
Pension funds, insurance companies, sovereign wealth funds, and many other financial institutions rely on the returns of safe bonds to grow their investments. Now, if bonds are failing to provide them with the returns they need to pay their stakeholders (often pensioners), where will they eventually put their money to get higher rates of returns?
Would they buy stocks? They might, but stocks are risky assets. Pension funds and insurance companies need something more secure, something that holds value, an alternative to bonds that are providing negative returns when you take inflation into concern.
There is an answer…
I can’t help but come to the conclusion that gold could be the most viable option for pension funds and insurance companies down the road. Why? Because eventually, the name of the game will become preservation of capital, not the growth of it. You can’t preserve your capital investing in bonds when we live in an environment of negative real returns.
According to the Sovereign Wealth Fund Institute, the world’s sovereign wealth funds alone have combined assets of $7.2 trillion! (Source: “The Trouble With Sovereign-Wealth Funds,” The Wall Street Journal, December 22, 2015.)
Now let’s run a hypothetical scenario. Let’s assume that these institutions—just the sovereign funds—want to allocate 10% of their assets into gold. This would be about $720 billion.
What does a $720-billion investment mean for the gold market?
The gold market isn’t very big. According to the U.S. Geological Survey’s early estimates, in 2015, 3,000 tonnes of gold were produced through mines worldwide. (Source: “Gold,” U.S. Geological Survey, last accessed March 23, 2016.) Three thousand tonnes amounts to 96.5 million ounces. In monetary terms, assuming a gold price of $1,250 per ounce, this amounts to approximately $120.56 billion.
If sovereign funds put only 10% of their money, $720 billion into gold, sovereign funds would buy the global yearly mine production six times over.
Long-Term Gold Price Outlook
Despite showing stellar performance in the first two months of 2016, gold bullion remains out of favor with both investors and mainstream stock advisors. From experience I know investors tend to ignore great opportunities when they are selling at dirt-cheap prices, like gold is today.
I continue to believe gold prices are severely undervalued. If sovereign funds step up their game and move just a little bit of their money into the gold market, my prediction of gold bullion at $3,000 an ounce could prove too pessimistic.