Gold Investing: How Much Is Too Much?
Sunday, 9/17/2023 16:57
Investment allocations apparently 'look too high'...
DO YOU own too much gold today?
asks Adrian Ash, repeating the question he asked readers of BullionVault's Weekly Update
email last Monday.
That's an odd question, perhaps, for a gold-bullion business to ask.
But as a trading exchange, BullionVault makes (a little) money whether you buy, sell or hold.
And as a long-term business, we would rather have happy customers...
...pleased with both their experience and their returns from using our service...
...so that they continue (or come back) to buying and selling through our technology in future, rather than throwing in the towel after taking a bath on the price and walking away for good.
Of course, for your personal portfolio, we can't (and won't) offer you advice on how much (or how little) you "should" keep. But we do have analysis and ideas to share.
You can find more on
gold's potential as 'investment insurance' here. And just for reference, our summer 2023 survey of BullionVault users found, yet again, that they're
allocating around 20% of their investable wealth to precious metals overall.
Too much? Too little? Investors as a group worldwide might be holding more gold than is good for them today.
Or so this chart suggests...
"Investors' allocation to gold
looks rather high by historical standards at the moment."
So says strategist Nikolaos Panigirtzoglou at US banking and investment giant J.P.Morgan.
Without his chart, the claim sounds absurd.
Sure,
Chinese walls and all that. But you have to wonder why he didn't go and check with his bullion-desk colleagues at JPM before publishing that note.
I mean,
gold coin and small-bar demand has sunk in 2023, most especially in Europe, while speculative betting on Comex contracts has retreated, and the size of gold-backed exchange-tradec trust funds has shrunk to the smallest since March 2020,
erasing the huge gold ETF inflows made during the Covid Catastrophe as money managers and private bankers pull their clients out.
That's why calling investor allocations to gold "rather high by historical standards" seems to get things backwards right now.
"Tumbleweed" would be closer, as one competitor I bumped into last week put it.
But let's hang on a second. Because outside the gossip-mill and "mustn't grumble" moaning of precious-metals dealers, might that chart have a point?
For instance, and while the number of new first-time buyers on BullionVault has indeed
dropped across summer 2023, the quantity of gold belonging to our users has continued to edge higher, setting 3 new month-end records in a row...
...albeit adding just a few hundred kilos today compared to the sum of client holdings back in May.
That means the strength in gold prices has been free to take the value of those holdings higher as well. It has ended 5 of the last 6 months above $3.0 billion.
That's almost twice the value of BullionVault users' gold back in 2012, when the chart from Panigirtzoglou says all investors as a group last owned this much gold as a proportion of their portfolios.
So is that it? Are investors max'ed out?
Put another way, do today's high prices, plus the lack of new investor inflows, suggest the market is reaching a plateau...
...running out of puff...
...and getting ready to take a nasty tumble, like
gold sank in 2013 so plainly (and painfully) or after the
gold mania top of the early 1980s?
Owning any more than 0% gold looked a very bad move, in hindsight, after those dreadful bear markets.
Whereas today, "Investor allocation to gold stands at its highest level in 11 years," says that chart from JPM strategist Panigirtzoglou.
So far, so "Gulp!"
But the analysis accompanying that chart highlights a key issue. Well, 3 issues actually.
First, strategists are a special kind of analyst, paid to make headlines with bold claims and complex, join-the-dots if not mystical forecasts for how all-of-this-what's-happening-in-the-world-stuff will clearly pan out, if only you enjoyed the 35,000-feet vision they possess.
Think, for example, of Dylan Grice at Société Générale
a decade ago...or (now former) Credit Suisse strategist Zoltan Poszar, the
most recent darling of investment doomsters everywhere.
Panigirtzoglou, on the other hand, might struggle to
get more ZeroHedge hits if he persists in warning against gold rather than urging clients (and ZeroHedge readers) to buy it.
Luckily, however, he's already been called "one of the
more interesting investment strategists working today" by the
Financial Times' team of bloggers (price that as you will) after forecasting in spring 2022 that Bitcoin will replace gold as the world's "alternative currency" and therefore trade above $140,000.
Maybe. One day. Clearly not yet, now down over 15% at $25,000.
But as it is, his 'big picture' chart of gold investment fits the same model, throwing everything into deep historical context.
Second, however, that context actually doesn't run so deep today. Because the chart from JPM's strategist only shows the size of investor allocations since late 2010.
What did the ratio say before then? Was the 2012 peak a notable high, far above the long-term average or recent peaks?
"When I started in precious metals in the early '80s," said one head of metals trading to the London Bullion Market Association's annual conference way back in 2010, "I understood that private clients would hold around 3% of their wealth in gold bars and coin...But over the next 20 years, those reserves were really liquidated,
down to pretty much zero by 2000."
At the same event, held in Berlin in September 2010, "Virtually all
US pension funds hold less than 0.30% of assets in gold," said another speaker, calling that ratio a long-term low rather than a peak.
And around the same time, we also tried here at BullionVault to weigh the level of gold investing against historical norms too...
...contrasting the
total value of all the gold ever mined in history, then worth perhaps $7.6 trillion, against the best available estimates for the sum total of the world's investable wealth.
That came to only 3.9%, and it contrasted sharply with a figure of well over 20% which we found given for the 1920s...
...a valuation from a different world, to be sure...
...but an allocation which, by the end of last year, had actually slipped, down to 2.8% when you compare
the best estimate for all the gold ever mined against
the leading estimate for total global wealth in 2022 despite rising above $12 trillion in total.
Not all that gold was held for investment, of course. Not unless you accept that buying gold jewellery very often carries a store-of-value and investment motive too. (Which it does.)
So on those terms, our metric may well be less important to the question raised by JPM's strategy note than the chart that they have produced.
But third and last, however, the data they use also includes a type of "investment" which doesn't fit the common-or-garden sense of the word. Because JPM's data features and highlights the role played by central banks.
"There is little doubt that the pace of central bank purchases holds the key to gauging the future trajectory for gold prices," says Panigirtzoglou.
That analysis may well prove true. Most analysts and traders inside our market would agree it's certainly been important to prices over the last few months and more.
But including central banks as 'investors' in gold risks confusing their motives and behaviour for the more tactical and quick-fingered trading which private capital has tended to show with regards to the precious metal...
(...contrast Spring 2013's exodus from gold ETFs, for instance, with the slow-burn selling from Western central bank holdings of the late 1980s and '90s...)
...and it also warrants looking further back than the peak of the global financial crisis.
Doing that, as does our chart above, shows that central banks as a group entered the 21st Century...
...back when gold prices were setting multi-decade lows at the turn of the millennium...
...with a greater proportion of their reserves in gold than any time since then outside
the 3 gold price peaks of the last 3 years (Covid's first wave, Russia invading Ukraine, this spring's mini-crisis in banking stocks).
Bottom line? JPM's point is worth keeping in mind. But that's because private investment inflows to gold have become very weak – negative in fact for ETFs – so far in 2023.
That has left consumers to support the price through jewellery demand and it's seen
gold-buying central banks step in to keep the bid high, driven by the same geopolitical mess and horror which on the best available estimate spurred the heaviest official-sector demand of the modern era in 2022.
So like we asked in start-September's
Weekly Update: What happens to prices when private-sector investment demand does return?
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