The broad, global move to precious metals continues. It’s so vast that some see it as a “great rotation,” one that suggests gold – and silver – will become every bit as mainstream as equities and debt securities for the foreseeable future.
“Great rotation” is, in fact, a term that historically has been used to describe periods when massive sums of money move from fixed-income vehicles to equities. Such moves typically are cued when interest rates drop so low that long-term savers find themselves effectively chased from yield-bearing assets that pay practically nothing. Even though many of these savers are inherently equity-averse, they will move there nonetheless in a desperate attempt to realize a reasonable return on their money.
But in a world characterized by not only persistently low interest rates but also just-as-persistent economic tumult and geopolitical upheaval, recipient assets of the money flowing out of bonds now include reliable safe havens such as gold and silver. Both metals steadily strengthened throughout most of 2019, but when the pandemic hit and the Federal Reserve committed in March to doing whatever is necessary to keep the economy afloat, gold and silver went ballistic.
It turns out that one of the reasons for this tremendous surge is a new dedication to gold and silver demonstrated by hedge funds and global asset managers. These are not entities that typically spend much time dwelling in the realm of so-called alternative assets. But the pro-gold environment that exists currently is unlike anything we’ve seen in a long time. And while these fund managers probably would prefer to dine on equities, the table that’s been set by the pandemic and the Fed’s response to it has made precious metals too tempting to pass up. Retirement savers who are still pondering a move into metals and looking for just one more piece of evidence that they should go for it could do worse than point to the money that global fund giants have been pouring into gold and silver this year.
Hedge Funds and Global Asset Managers Make Big Bets on Gold and Silver
You may be aware by now that legendary money manager – and famously anti-gold – Warren Buffett made headlines recently when it was revealed that in the second quarter he picked up an interest in the yellow metal through mining company Barrick Gold (symbol: GOLD). While purchasing shares of a gold miner admittedly is not quite the same thing as buying the physical metal, neither is it immaterial to the discussion at hand. The fact is Buffett recognizes the compelling environment that exists now for precious metals, and has elected to participate in the ongoing gold rush in the way he knows best.
As it turns out, Buffett is not by himself when it comes to money management giants making significant commitments to gold and silver in recent months.
Another notable who said, “Yes” to gold in a big way last quarter was Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund. Bridgewater already had a gold position heading into Q2, but massively expanded on it by pouring an additional $400 million into gold ETFs (exchange-traded funds). When Dalio was finished, the SPDR Gold Trust (symbol: GLD) was the hedge fund’s second-largest position overall.
Another hedge fund, Mason Capital, made a remarkable commitment to gold through GLD in Q2. Owning none of the ETF prior to the quarter, Mason bought more than 4 million shares. That extraordinary purchase resulted in GLD representing nearly 70% of the fund’s total portfolio by the end of Q2.
Other hedge funds that roared into gold last quarter include Sandell Asset Management and Caxton Associates. Like Mason, Sandell didn’t hold any position in gold before Q2 and Caxton’s position was so small (just .05% of the portfolio) that it might as well have been zero. By the time Q2 was at an end, GLD was Caxton’s single-largest position, representing a little more than 36% of the fund’s total assets under management.
What’s more, while gold may be the marquee precious metal, it was not the only one targeted by big-time money managers last quarter. BlackRock, the world’s largest asset manager with more than $7 trillion under management, made the second-largest purchase of iShares Silver Trust (symbol: SLV) in Q2. Blackrock owned 26,683 shares of SLV at the opening of the quarter; by the end of Q2, BlackRock owned 5,450,222 shares. That amounts to an increase of more than 20,000%.
Ultra-Gold-Friendly Climate Could Persist Another Four Years – at Least
So why are all these asset managers – including the famously gold-averse Warren Buffett – going for gold right now?
They’re doing it for the same reason central banks, financial institutions and individual savers have been going “all in” on precious metals for month now: Because the current gold-favorable environment, characterized chiefly by drastically accommodative monetary policy and an expectation we’ll see years of record deficit spending in the pandemic’s wake, is anticipated to be with us for years to come. For his part, Federal Reserve Chairman Jerome Powell recently made remarks that suggest we could be at least four years away from the next interest rate increase.
The economic outlook for both gold and silver has not been this good in years. The last time it was even remotely as robust, gold surged 160% and silver skyrocketed 400%. Those numbers were posted from 2008 to 2011, key years of the financial crisis and a period during which the Federal Reserve initiated the first two rounds of quantitative easing in its history.
The economic environment of the next several years could prove even more fertile for precious metals, which is why we’re seeing another “great rotation” to gold and silver. Money managers are participating in a big way, and, in the process, sending strong signals that it’s time for everyone else to participate.