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What Would Happen If Mainstream Investors Discovered Gold?

China, India and Russia are accumulating a lot of gold, but they’re virtually alone. Traditional money managers, for a variety of reasons, view the metal as neither a viable investment (because it doesn’t pay interest) nor a substitute for cash (because they don’t understand monetary history).

But what if they changed their minds? From Chapter 21 of The Money Bubble: What To Do Before It Pops:

The fact that the East stands ready to buy all their gold at late-2013 exchange rates presents developed-world central banks with a dilemma: They can continue their manipulation, in which case they will soon run out of metal. Or they can step back – like they did when the London Gold Pool collapsed in 1968 – and let market forces choose an exchange rate, which will almost certainly be far higher than at present.

To understand how quickly and dramatically the latter scenario might play out, consider the current asset base of the money management industry. Most of the world’s approximately $100 trillion of liquid wealth is overseen by mutual funds, hedge funds, insurance companies, sovereign wealth funds and pension funds. And they own virtually no gold.

Shayne McGuire, head of global research at the Teacher Retirement System of Texas, estimates that pension funds, for instance, have allocated about 1/3 of one percent of their $30 trillion of assets to gold. If they were to up their exposure to just one percent (still extremely low) that would represent new demand for about $200 billion worth of gold, or about 4,700 tonnes at the metal’s late-2013 exchange rate. That’s more than 5-times the weight of gold that now resides in GLD, the biggest gold ETF, and about 125 percent of the late-2013 market capitalization of the entire gold mining sector. If pension funds allocate five percent of their assets to gold – which is still modest when viewed against historical records – the resulting $1.4 trillion increase in demand would overwhelm the market, virtually guaranteeing the kinds of defaults and shortages that almost took place in early 2013.

And that’s just pension funds. The other institutional investors mentioned above have $70 trillion under management and also own very little gold. A one-percent swing in their allocation would send another $700 billion into this small, thin, already-out-of-balance market, further destabilizing it.

This shift in demand alone would be enough to change the industry’s perspective on gold from “ignore” to “get some before the quarterly reporting deadline.” Toss in a default by a major metals exchange or an announcement by China that its reserves are actually 4,000 tonnes and it intends to back the yuan with gold and use it instead of the dollar for international trade, and the combination of renewed interest in gold and loss of faith in the dollar would send the gold/dollar exchange rate soaring.

47 thoughts on "What Would Happen If Mainstream Investors Discovered Gold?"

  1. Darryl Jewett….How would you know how many more uprisings etc before governments and banks lose control, that’s just your opinion. It could happen in weeks or overnight very easily but you don’t know that, so why state speculation as fact.

  2. 1913 was the year the Federal reserve was created. It took $21 paper dollars to buy 1 oz of Gold. Today Gold is worth $1800/oz and the purchasing power of the $21 is worth about $0.63 … No one can tell the future so whats the next best thing .. see what history says about it ..

      1. You are an idiot. The dollar is the biggest fraud in U.S. history. The dollar was a promise to pay in silver…and that promise was broken.

          1. Wait…you said your 20$ note is worth more than an ounce of gold at a hardware store.

            So if you owned a hardware store and I brought 20$ worth of goods to the cash register and I offered you 20$ or an ounce of gold, you are telling me you would take the 20$???????

            No you wouldn’t, because an ounce of gold is worth FAR more than a 20$ note.

          2. no i’m telling you I don’t own a hardware store so it doesn’t matter to e what gold is worth – only the hardware store owner and to him, he’ll take a twenty note.

          3. Ugh… you really aren’t too bright.

            I said IF you owned a hardware store, and I wanted to buy 20$ of goods from your store. And I offered you a 20$ note or an ounce of gold. Which would you take? It is a very simple question.

            Let’s find out if you are stupid or not.

          4. Thank you. So your comment saying 20$ note is worth more than an ounce of gold was wrong and you knew it was wrong.

          5. the government controls the value of gold. and right now it says it’s worth whatever. and there are many mechanisms for manipulating its value. the more short-sighted and poor our economy becomes, the more valuable gold becomes to those who have considerable wealth but the less valuable it becomes to those who do not.

  3. In 1913 was the year the Federal reserve was created. It took $$21 paper dollars to buy 1 oz of Gold. Fast forward to today and Gold is worth $1800 oz and that $21 is now worth about worth $21/oz. and the dollar was worth a dollar. Today Gold is worth $1800/oz and the purchasing power of the $21 is worth about $0.63 … No one can tell the future so whats the next best thing .. see what history says about it ….

  4. “…that now resides in GLD…”

    I hope that was meant tongue-in-cheek because that is the ONLY way I and others would read it. Inventory anyone?

    Paper or physical today, Madam?

  5. At some point the debt bubble will hit the wall and there will be a kind of reset. Gold/PMs will be a natural/logical starting point because it is “anti-debt” (i.e., has no counter party risk). Maybe holders of “real” assets will also be okay, but not as liquid as possessing gold. Businesses that produce things of value may or not be okay depending upon how they’re structured. Real estate is better than nothing but I suspect its values will be based upon offers that don’t involve credit (i.e., “cash” versus monthly payments.) It’s going to be wild, but it may not be soon. We shall see.

  6. An investment is “worth” what others will pay for it. The size of the pool of “others” is what determines the fungibility of a given investment. Private Indians hold about 20,000 tons. Who knows how much gold is inside China’s borders? Germans have recently started buying a LOT of gold. The pool of potential buyers is far higher for gold than for tulip bulbs,,, or U.S. treasuries. It does not matter what YOU think. It matters what 3 billion other people think.
    Because of Gresham’s Law and Triffin’s Dilemma, no currency will be gold backed in the future. Bonds are a different story. Currencies will still circulate but, all clearing will be done in gold. The U.S. will default on foreign obligations. Future clearing for oil will be done in gold, NOT treasuries.

  7. It is obvious nearly all central banks dare not accumulate gold except for China, Russia, India and a few others. Already Russia and China are threatened with war. Once the alternative systems is properly set up, payment as well as the gold standard for reserve pegging, gold will soar. Alternative payment system has to be ready soon before the next recession, which is soon, as global trade will come to a halt if it is not ready. 2008 is a good lesson on this.

  8. It’s not worth anything until you sell it. It’s what my father always told me before i invested in something so i always looked before I leaped. However if what I was buying had intrinsic value then money was no object. Just owning was a privileged.

  9. It’s because they DO understand monetary history that no-one bothers with it, it’s worthless.

    1. Lets see I can go with your opinion that its worthless or thousands of years of economic history ……hmmmm ….. history please ….

      1. throughout almost all of history up until wwii, economies of the world were local and gold had intrinsic value. especially when currency was gold backed. that’s not the case anymore. gold is worthless. try and exchange it at the local hardware store. they’ll laugh at you.

        1. Talk to the owner. Tell him I’ll give you an ounce of gold for a rake, a drill, a lawn mower. See if he takes it. if he doesn’t I’ll sell you my lawn mower right now if you give me an ounce of gold.

          True, gold has been outlawed as “legal tender.” the government did this because it wanted a monopoly on “money.” It didn’t want competition.

          Would you give someone $20 for a 1-ounce gold coin? If it is “worthless” you would not. But I bet you would give someone $1,ooo for that coin. And that night sell it on e-bay for $1180 to get some of the paper you prefer. Five years from now, you will be crying that you sold for that paper.

          1. yeah I understand what you’re saying. but if you were starving and all you had was gold coin, you might give it to someone in exchange for a meal. it’s context. I don’t dispute the intrinsic and historic value of gold as a rare precious metal. but it’s only worth what someone will exchange for it. and right now it’s nothing. and it may be worth more (some day) but then again it might not or it might even be worth less. at my age, I don’t have the luxury of planning too far into the future.

  10. mainstream investors HAVE discovered gold and determined that in the US it’s worthless. gold is only worth as much as that which someone else will exchange for it. which isn’t much. and governments can invest in it because they in part can determine its spot value. they regulate its value like they regulate excessively the value of every other asset (including the stock market). but a private investor can’t influence the value of gold. the US government already taxes the exchange of gold. so on and so forth. investment in gold is a bad investment.

          1. thx and what is spot right now because here’s one problem: you can ask ten different people and get twelve different reports of spot with a considerable error term of well over two-hundred dollars. also when you buy it will you pay the exchange tax on it? not being sarcastic but that’s the kindsa stuff that people don’t think about when they talk about gold. it’s only worth as much as someone thinks it’s worth and there’s considerable variation. betcha I can get twice as much as you’re offering even after a plane ticket in india. gold has no absolute value. it does have value however and is worth a small proportion of a portfolio but I wouldn’t invest to much of my net worth in it. what goes up must come down. and I definitely wouldn’t buy but a coupla pounds of silver. why? because it’s only $17/oz and it’s very heavy. carting enough of it around to matter isn’t worth it. not as bad for gold but still a problem. per mass, my twenty note from the US Treasury is still worth a lot more than gold. if the value of that drops enough to matter, then we’re talking a catastrophe of biblical proportions. gold will never be worth more than what it’s worth relative to the dollar right now anyway. it came unpegged at about $1,250. gov’t doesn’t want that to change. none do. so it won’t.

          2. no i’m no politician. I suffer from an autistic spectrum disorder. that and politics don’t mix too well lol. but I am trying to make a point that even our markets for precious metals are manipulated by governments and central banks. there are no limits to what they will do to suppress price. maybe someday everything will come unhinged. but not for a long time. there are plenty of men to enslave and plenty of uprisings before governments and central banks lose absolute control.

          1. I’m not a hypocrite. just the opposite. i’m compulsively honest. how is what I wrote evidence that i’m a hypocrite? I’m trying to make a point that even our markets for precious metals are manipulated by governments and central banks. there are no limits to what they will do to suppress price. maybe someday everything will come unhinged. but not for a long time. there are plenty of men to enslave and plenty of uprisings before governments and central banks lose absolute control. and by that time it won’t matter. this past week I went to a local jeweler who buys and sells gold and he offered $1,100. same with a local pawn shop owner. last I checked, spot is around $1,190 or so. tell you what, if you think gold will be so valuable (in our lifetimes), i’ll sell it to you for $6,000 / oz. I’ve heard that from many respected economists and financial advisors as a low estimate of what gold should be worth. I’ve heard upwards of $9,000 / oz. when spot is only $1,190 or $1,100 or whatever someone else wants to lie it’s worth, that disparity pretty much limits its value. does that make sense? so i’m not being difficult or hypocritical or overly critical, it’s just that we live in a time when evil people enslave and manipulate honest men and as long as that’s the primary currency, then all other forms of exchange are worthless.

          2. Are these respected economists and financial advisers the same ones that said there wasn’t going to be a housing collapse …

  11. If they did I don’t think it would make the news. Gold is what crazy people and foreigners buy. Must keep an eye on Red China they will eventually pull the gold card.

    1. Really? That would make the Chinese MUCH smarter than you. Dumpster food can sort-of be digested. Enjoy!

    1. Gold is a bad investment? It’s one of few sensible investments if you’re paying attention to the gathering storm. Do what China is doing.

      1. the government of china can invest in gold because it has absolute power and dictates price and terms. the average citizen who is investing can’t benefit from it. with taxes and shipping fees and transfer fees, etc… the average citizen investor will likely never see a return on the investment if he can get any return at all.

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