Sovereign Wealth Funds Are Worth Watching for Where Gold Prices Go
If you want to know where gold prices are headed, it’s important to pay close attention to the sovereign wealth funds around the world. They could play a major role in sending gold prices to above $2,000 an ounce in the next few years.
What are sovereign wealth funds? At their very core, they are government-owned investment funds. They manage their respective nations’ wealth and try to generate a return on the funds under management.
Let’s get this straight; these funds have a lot of money under management. In total, they have a little under $7.6 trillion under management. (Source: “Sovereign Wealth Fund Rankings,” SWFI, last accessed March 5, 2018.)
Now, you also have to know one more thing; these sovereign funds are not big risk takers. They are there to generate consistent returns. So, they look to make an investment in quality assets.
Given the interest rate environment in major economies, bonds may not be the best investment options for them just yet.
You see, currently, bonds around the world are witnessing a sell-off. It’s not just the U.S. bonds. For example, at the time of writing, 10-year German government bonds were yielding 0.65%. Not too long ago, they had a negative yield.
Bond prices could go much lower given that the interest rates around the world are expected to go higher.
Stocks, especially in the major economies, have seen a massive increase as well since their lows in 2009. In the U.S. for example, we see stocks trading at extremely high valuations relative to the historical averages—their highest since the tech bubble. Would they buy stocks knowing this? It’s very hard to imagine they would.
Why Gold Could Make Sense for Sovereign Wealth Funds
With that said, what could be a quality asset for these sovereign funds?
Gold could be something these funds look at in the coming months and quarters.
Why? Simple. Over the past few years, the gold market has improved immensely in favor of the bulls. There’s constant demand from consumer central, while the supply side is struggling. Economics 101 suggests that this is the perfect recipe for gold prices to go higher.
But, that isn’t all.
Inflation is starting to pick up in places. Remember, after the financial crisis, central banks around the world printed a lot of money and kept their interest rates low. Now, all that monetary inflation (money supply increasing significantly) is catching up to the prices.
Gold could be a great investment for the sovereign funds in times of rising inflation.
Gold Prices Outlook: Just a Small Sum Could Send Gold Soaring
Dear reader, the sovereign funds don’t have to allocate all of their funds to gold. It would be poor management if they did. If we assume just 10% of that $7.6 trillion is used to buy gold ($760.0 billion), it could have an immense impact on gold prices.
Don’t forget that the gold market is small when compared to bonds and stocks. In no time, gold prices could be skyrocketing toward $2,000.
While we are at this, keep one thing in mind; sovereign funds won’t reveal that they are buying gold. If they do this, speculators could front run them and cause the gold prices to go higher. We only find out once they have accumulated a position.
Obviously, with time, we will know more. But going forward, sovereign wealth funds are definitely worth watching if one is a gold bug.