Jeff Clark

It may feel like I’m out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.

There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.

Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world’s money supply isn’t getting any smaller, and all that cash has to go somewhere.

I wanted to look at cash levels among various investor groups to get a feel for what’s out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you’d expect, the contrast is still rather striking.

Corporate Cash and M1 vs. Gold and Silver Investments

Naturally, not all this money or even a big chunk of it will be used to buy GLD, Barrick, or American Eagles, but it’s clear that if any significant fraction of the cash sloshing around the economy were to be used to buy gold, it would have a major impact on the price of gold — which would trigger the mania I fully expect. Let’s take a quick look at what kind of impact our sector could experience if just a small amount of available funds were devoted to various forms of gold and silver.

  • The entire worldwide value of all gold exchange-traded products (ETPs) currently represents just 2.1% of the cash and short-term investments held by S&P 500 corporations. If 20% of these companies decided to put a mere 5% of their available holdings into these precious metals vehicles, their value would more than double.
  • If just 1% of the physical currency (M1) floating around the system were used to buy gold Eagles, it would be 13 times more than the entire value of all coins purchased last year.
  • If corporations chose to invest 1% of their cash in silver ETFs, it would surpass the total current value of all such ETFs.
  • If corporations moved 5% of their “short-term investments” evenly into gold stocks, the market cap of every gold company would increase by 20%.
  • If they chose silver stocks, they’d each grow by a factor of six.
  • Five percent of M1 would increase the market cap of gold producers by 14%. The same fraction would be 3.4 times bigger than the entire current value of all primary silver producers.

This is just S&P 500 corporations — there are many more corporations in the world, as well as pension funds, hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, insurance companies, and other ETFs.

It’s striking, when you really stop to think about just how big the impact could be if some significant fraction of the larger financial world started chasing the small niche market that is gold. Such cash inflows will send our industry to the moon.

In the meantime, keeping our eye on the big-picture forces that have yet to play out is the plan to follow. Sooner or later, though, I’m convinced the catalysts will kick in that will pull/push/drag/compel/force the mainstream into our sector. I suggest beating them to it.

And when the mania arrives, we’ll all wonder why anyone doubted it in the first place.


Jeff Clark,
for The Daily Reckoning

Jeff Clark

Having worked on his family's gold claims in California and Arizona, as well as a mine in a place to remain nameless, Jeff's research and writing skills are utilized in his role as editor and one of the primary writers of Casey's Gold & Resource Report.

Whether it is researching new companies to recommend, analyzing the big trend in gold, or looking for other safe and profitable ways to capitalize on the bull market, Jeff is devoted to making Casey's Gold & Resource Report the best precious metals newsletter for the prudent investor. He coordinates the efforts among the research and writing team, ensuring that whatever is happening in the gold and silver market doesn't escape coverage.

  • Chris

    A Mania is: “mental illness marked by periods of great excitement, euphoria, delusions, and overactivity.”

    The table may be set for a ‘Mania’ in gold and silver, but the figures quoted in the article are not for mania investment levels, but rather pedestrian levels of sound sensible allocations into gold and silver, hence when the ‘Mania’ comes expect even better results than those illustrated.

    To help accelerate a return of general prosperity, buy physical Gold, and especially Silver – as it hurts the money manipulators, those that set the interest rates the most.

    Have no doubt, America is bankrupt, Europe is bankrupt, and 9/11 was an inside job. Don’t despair the Internet reformation will set up free.

  • David

    Well, it is probably not going to go down a lot ;)

    Yes, I think the reward to risk ratio is huge

  • CT

    Well we know you hope so.

  • http://DR Starving Steve

    I remember $47 on Post St. in downtown San Jose, CA for a 1.2057 troy ounce in gold: 50 peso centenario from Mexico. And $47 was the sell price over-the-counter to anyone with cash in 1961. In downtown San Francisco on Sutter Street, $15 cash bought a gold sovereign from Britain, any date you desired. That wasn’t that long ago……

    So, gold is now $35/ounce—–> $1600/ounce. That’s a gain of 4600%.

    Now, with Bernanke preaching “stimulation” and “accommodation” in the money supply, he is quietly draining the cash (M-1) out of the U.S. economy by keeping interest rates at zero percent. That makes it more than difficult for banks to make profitable loans on anything unless the buyer has at least 50% down-payment in cash. And who has 50% cash to put down on a $500,000 house, for example? So the loan is not made, and the money is not created by the bank to make the loan….. This is a whole new ballgame: de-flation. Money just sits in bank accounts, and it no longer turns-over. The velocity of money (M1) is approaching zero.

    So, after a gain of 4600%, are there some fools who thing they can get even more for a gold investment?

  • http://DR Starving Steve

    One can see the de-flation setting-in in the housing market. The sold signs are removed off of the lawns in front of the homes a few weeks later—- because the banks won’t loan money at 2.5% unless more than half of the price of the home is put-down in cash by the buyer.

    The game has changed: the buyer with cash talks at the bank, and buyers with big ideas about what property is going to be worth and what mortgages might be had…. walk.

  • http://DR Starving Steve

    Two other things to consider at $1600 gold: 1.) America is now exporting oil again, and for the first time since 1949. Guess what gold was worth in 1949? And regardless of whether oil goes up or down in price, the exports mean more cash for America and less borrowing from abroad. In other words, the U.S. dollar is in short supply, especially abroad where oil has to be purchased from America. The dollar may not be as good as gold any longer, but the dollar is as good as oil.

    2.) As the bills for 50cent per kwh electricity come-in in the mail to those who championed windmills and solar power, the U.S. dollar (to pay the bills) will be in even shorter supply. So, atomic power plants and conventional fossil-fuel power plants will have to be built immediately in order to bring the price of electricity back down to two or three cents per kwh. Hydro-electric dams would shave the price of electricity down to 8cents per kwh…. But whatever replacement of green energy is chosen, it will take dollars for capital costs. These dollars will have to be financed in the bond market— and financed in a bond market where U.S. dollars have become scarce.

    Big reckonings ahead for the Americans and the world.

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