-- Published: Wednesday, 5 February 2020 | Print | Disqus
Craig Hemke, TF Metals
At the recently completed World Economic Forum in Davos, many interesting stories and headlines emerged. Here's one you may have missed.
In our 2020 forecast, we wrote that you should expect higher gold and silver prices this year due to a continuation of the trends from 2019. And we expect great things for "all forms of precious metal" as the global investment community slowly begins to add asset allocation to the sector. If you missed this forecast in January, here's the link:
As 2019 ended, global asset allocation to the entire precious metals sector remained under 1%. And by the term "sector", we mean not just physical metal but all of the substitutes too: futures contracts, unallocated accounts, ETFs, and the mining shares. So what will happen if continued debt monetization, QE, and negative interest rates combine to drive global asset allocation to 2%? Or 3%? You'd have a massive amount of new dollars chasing what is primarily a finite amount of investment opportunities. The inevitable result is higher prices, and that, in a nutshell, is the basis of our 2020 forecast.
Now back to Davos. Over the weeklong confab, there were all sorts of financial predictions and prognostications, so it would be easy to miss any one in particular. However, one caught our eyes at TFMR, and you should be sure to see it too.
There is a global asset management company called "Guggenheim". You may or may not have heard of them before, but frankly that doesn't really matter. What DOES matter is that Guggenheim Partners has more than $270,000,000,000 in assets under management. That's a lot of cash, but Goldman's AUM is 8X that amount, so it's not like Guggenheim is some sort of financial behemoth.
The Chief Investment Officer at Guggenheim is a man named Scott Minerd. While in Davos on January 22, Minerd was interviewed live on Bloomberg television, and he made a few headlines by describing the equity markets as a "Ponzi scheme". Simply watching the two hosts wriggle and squirm as they hear this makes the clip below a must watch. However, what you really need to hear is what Minerd calls his "#1 conviction trade of 2020". To get it, you need to watch all the way to the end.
So that's nice. Scott Minerd thinks thatSILVERis his #1 trade idea for 2020. Great! That puts him with Ray Dalio, Stan Druckenmiller, and a few other notable big shots who've publicly stated that they like the precious metals. More and more of this type of notoriety for the sector will certainly help to drive that all-important global asset allocation from 1% to 2% and beyond.
But let's get down to the heart of the matter.What will Minerd actually recommend to Guggenheim clients, and what will he himself purchase as CIO?Probably something like the SLV or some other ETF. Maybe he'll get really crazy and recommend some unallocated metal at what he wrongly thinks is a trustworthy bullion bank.
But what would happen if Minerd really walked the walk? Again, Guggenheim claims more than $270B in assets under management. If Minerd is really serious about his "#1 Conviction Trade", what could he buy?
•He could start by buying the entire junior silver miner ETF—the SILJ from PureFunds. That would only cost about $150,000,000.
•For fun, he could also buy the entire junior gold miner ETF—the GDXJ. That would only cost about $4.8B.
•So far, he's only invested $5B, and that's less than 2% of Guggenheim's AUM. You'd think a "#1 Conviction Trade" would be worth more than that.
•So let's next have Minerd buy the entire senior gold miner ETF—the GDX. That's more expensive, but he could do it for about $13B. Now we're getting somewhere, but that's still only $18B and about 6.7% of his AUM.
•And in the end, it's silver that's his big trade idea, so why not just buy all the silver in the world? It's been said that, at most, there are only about 1.2B ounces of physical silver above ground. At $18/ounce, ole Scotty-boy could buy every single ounce for under $22B...which would still be less than 10% of Guggenheim's assets under management.
Yes, there's a certain amount of absurdity to all of this, andthat's the point!Guggenheim Partners is just one tiny cog in the global asset management machine. However, if they took even a small portion of their assets under management and applied it to the precious metals, they could almost corner the entire freaking sector! So what happens when Goldman, Blackrock, BoA, Vanguard, Fidelity, State Street, Allianz, Northern Trust—all with TRILLIONS under management—begin to shift some client cash into the precious metals in all their various forms? Do you think that gold will remain below $1600/ounce and the GDX under $30? Not a chance. The world is awash in cash, and the precious metals sector is too small to absorb even a tiny fraction.
So, in summary, understand that the macroeconomic conditions that drove the precious metals to their best gains in a decade last year will continue in 2020. Once the global investment community begins to understand this too, things will move pretty quickly. Thus, don't delay. Take action today.
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Craig Hemke, TF Metals
Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found atTFMetalsReport.com, an online community for precious metal investors.
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