G.I. Metals DMCC: A Catalyst for the Institutional Investment Precious Metals Awakening

As the precious metals bull market has already entered its second phase, central banks have already ceased being net sellers of gold, and have become net buyers of gold, pushing the price of this commodity up considerably.

The awareness stage of this bull market is expected to continue in its uptrend, with more individual investors coming on, along with increased purchasing of metals from these central banks. However, what will really drive up the price of precious metals to previously unthought-of of highs, will be the addition of another market sector; institutional investors.

Traditionally, institutional investors have been conservative in their investing strategy, particularly in their outlook to investing in precious metals. Because they have largely accepted the fiat-inspired argument that gold and silver are 'relics,' they have largely excluded themselves from the current ten year precious metals bull market. However, as equities, real estate and bonds are now being viewed by investors more and more as the ultimate bubble, these previously established conservative views towards gold and silver are being reconsidered. As this reassessment is going on, certain key institutional investment bodies have decided to buck this trend, and have made the leap into the precious metals market.

Institutional Investors Move into Gold

John Paulson of Paulson & Company and David Einhorn of Greenlight Capital have made this move. Mutual fund holder giant PIMCO has recently sold off all of its US Treasury holdings. Convinced that bonds are no longer the safe-haven investment many institutional investors have traditionally viewed them to be, PIMCO is looking at other safe-haven assets such as gold:

"The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong," stated Anne Gudefin, PIMCO's global equities portfolio manager. "We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers. We think that's an underlying trend that's very favorable for gold," she said.

Central banks certainly understand what is going on. With an increase in global economic and geopolitical uncertainties, precious metals are now, as they have in the past, treated as safe-haven assets. Hayman Capital hedge fund manager Kyle Bass recently advised the University of Texas' endowment fund to purchase physical gold bullion. The University of Texas' endowment fund is the second largest endowment fund in the U.S., and Bass - being a University of Texas endowment member - advised with the following: "Central banks are printing more money than they ever have, so what's the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can't print any more of."

They listened, and since then have purchased about a billion dollars worth of gold bullion. It is interesting to note that they did not purchase paper promises of owning gold; they purchased physical bullion, as the derivative-based paper market cannot physically back a large portion of their investors, were they to all call on physical delivery of metals at the same time. As we come closer and closer to a full scale monetary crisis in the world with even the United Nations speaking about the possible "collapse" of the world's reserve currency, the U.S. dollar. The eventual failure of the badly designed European Union and its currency, the Euro, is also common knowledge and expected. In the circumstances of a major world economic crisis - which is becoming more and more probable - many of those holding paper gold and silver will only be able to receive currency denominated settlements, the very thing they were hedging against in the first place. Hence, the whole concept of holding gold and silver is eliminating counterparty risk, something that the digital-derivative market does not do.

The Coming Shock Wave

The following chart illustrates how a barely visible 0.15% of a normal pension fund is typically allocated to gold:

If this tiny allocation were to move from 0.15% to a mere 5%, it would cause shock waves in the price of gold. This is only one type of fund; there are many. In fact, there are oceans of fiat currency which are rapidly increasing, waiting to land on a small pile of metals. All it needs is the right agitation within the investment community, and the conservative investment paradigm of institutional investors will be transformed. This will cause the prices of this asset class to literally skyrocket.

What we have described above is the beginnings of a fundamental change in strategy of fund managers, and as well, pension, endowment and sovereign wealth funds. Traditionally, they have been anti-precious metals, but the current state of the global economy has forced them to reconsider this position.

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