Gold & Institutions

QUESTION: Hello Mr. Armstrong,

First I wanted to thank you for your continued education and telling the truth about how things really work.  Seems we have been taught a load of cr-p.  I too am below water having listened to the gold promoters, who either are blatantly lying or have delusioned themselves to their false beliefs.

My question relates to Institutions not being able to invest in gold.  In the scenario that appears to be coming in the not too distant future, as institutions find their sovereign bonds imploding,  why won’t they diversify increasingly to investments that are doing better including gold?  Won’t the appeal at that time, convince institutions to finally give in to the pressures that abound and aren’t Sovereign Wealth Funds like China holding gold already?

Thanks again for all the invaluable work you do and for helping the little guy understand the complexity of the world we live in.

DK

ANSWER: From the institutional perspective such as pensions, they need something that pays a dividend. They must have income. They can diversify in going into shares of gold, but holding raw bullion is not an institutional thing and has never been. The risk that they do have is the government could confiscate such assets as they did before. Central Banks have held gold simply because the herd does. It really makes no sense for them to do so unless it is going to be used monetarily. This is really still a throw-back to Bretton Woods without any real foundation in practical use. They no longer need gold as a monetary instrument. It is becoming clear that money is simply confidence.

The VAST majority of institutions are going to lose money. That is just how it has to be. Yes we have a lot of institutions following us and many are starting to shift their portfolios. But this is still a small percentage of the whole. As the markets move against them they will be forced out of their bond positions. Keep in mind that their conservative position has been traditionally 40% bonds. There are almost $20 trillion in pension funds in the USA alone.

21CAPDSPL2

They will shift to equities from bonds. This is historically what they always do. You also have to realize that institutions stay with the herd. If they all have bonds or equities and lose, there is comfort in the crowd loses. If they stray outside the norm and lose, that tends to be a career-ender.

You just cannot judge the action of a board running a pension fund the same way you would reach a decision as an individual. These are typically decisions that are by consensus.