Gold under owned as an asset class

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“Despite having a solid track record as a currency of last resort in times of uncertainty, and despite the current global environment being arguably more uncertain than any point since the Second World War, current gold ETF (exchange-traded fund) holdings as a percentage of global ETF assets are tiny,” says James Luke, fund manager, metal at Schroders.

“Since then ETFs have expanded across asset classes while we have seen strong bull markets in bonds and equities. At the same time, and partly as a result, gold ETF holdings have fallen from over 85-million ounces in 2012 to around 68-million ounces (in August). Gold ETFs as a percentage of all ETF assets are now closer to 2%. For gold, in a world still awash in liquidity and with financial asset values very high, this is positive.

“We are not suggesting that ETF holdings in gold are not increasing; we have already seen total ETF holdings of gold increase by 32% in 2016 and by a further 8% year-to-date 2017.

“What we are saying is that around $15-trn of liquidity has been injected into global financial markets from central banks since 2008. So, when investors start meaningfully allocating to gold again, gold ETF holdings have the potential to grow at significantly higher rates than we saw during the 2004 to 2012 period.”

Gold equities

The same is true of gold equities. The current weighting of North American gold equities in the S&P500 and TSX has fallen to just 0.6% after reaching a peak of over 2% in 2012.

To put this low weighting in perspective, the entire North American (US & Canadian) gold producers have a combined market cap of less than $150bn. This is tiny and highlights the scarcity value of gold equities if a bull market in gold gets going. Essentially, this extremely low weighting reflects investors’ current low positioning around gold and gold equities, as well as the very high valuations of other more mainstream sub-sectors.