Gold Stocks: Why This Tiny Market Will Explode

According to Stephen McBride of Mauldin Economics, the current market cap of the world’s entire gold industry now stands at $324.4 billion. That’s a little less than the market value of Amazon and less than half of Apple.

Year-to-date, the average gold stock is up 142%. Over the same time period, Amazon is up 12% and Apple is up just 5.7%. In a performance driven market, how long does it take for institutional investors to start chasing gold stocks which are tiny by comparison to other industries?

Consider for a moment how much institutional money we are talking about here…nearly $120 Trillion and still growing. Since 2008, assets under management have grown a whopping 43%.

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Gold itself is also a top performing asset. Year-to-date, gold is up 26%, outperforming the S&P 500 by 19% (despite all those new record highs) and outperforming the USD by 29%. However, as a percentage of global financial assets, it is near all-time lows as the following chart shows:

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In 1960, gold accounted for 5% of global financial assets. Today it’s only 0.58%. Gold is the only asset that is no one else’s liability so it has an unrivalled ability to hedge the risks associated with financial assets. To get back to a 5% weighting, you would need to take the gold price to around $10,000. That’s not going to happen in my view. But if you cut the value of financial assets in half, as we did in 2001 and 2008, we would only need a $5,000 gold price to get back to 1960 levels of asset coverage. I think we could get there, believe it or not.

Do you think 5% is crazy dear reader? When I first entered the money business more than 50 years ago, it was a well-known rule of thumb to keep 5% of your portfolio in gold. At a time when $13.4 Trillion in bonds now sport negative yields to maturity and cash in the bank at best yields nothing, why would you be surprised if investors turned to holding gold again? And even more so gold stocks, the leveraged derivatives of gold, which, because of their size, are especially sensitive to money flows?

I understand your nervousness dear reader. A gold stock has probably never graced your portfolio and you could easily pick a dud. Also, your brokerage firm might ask you to get a sanity test although Schwab just came out last week with a well-reasoned recommendation on gold and gold stocks. To reduce your risk, you could take a look at GDX, the gold stock ETF. It’s wonderfully liquid and you spread your risk across more than a dozen gold stocks. But if you decide to get some, scale in; don’t buy it all at once. We could still see a correction short term.