If you sum up the stock prices of all the companies in the world, you technically get the market capitalization of planet Earth. So, in just a few months, the capitalization of the world stock market soared to $80 trillion, and continues its systematic movement towards the $100 trillion mark*.

The main points are:

• The capitalization of the global stock market exceeded $80 trillion;
• Such a long “bullish” trend – almost 9 years – took place even before the “Great Depression”;
• Goldman Sachs is convinced that the overall dominance of the bull market is nearing its end;
• According to Goldman Sachs, in the medium term we could expect either a protracted crisis or a sharp collapse in the securities market.

World market capitalization

What's troubling about this rapid progress is that the growth line has been steadily rising throughout 2017. Up to this point, global market capitalization had been like any other stock index: a series of gradual price increases over time, with a pronounced collapse during the 2008 financial crisis and subsequent economic recovery.

In 2017, the graph looked like a straight line moving upward without deviations.

In the medium term, either a protracted crisis or a sharp collapse is expected

International analyst Christian Müller-Glissmann and his colleagues at Goldman Sachs believe that the overall dominance of the bull market will soon end: “Average quantile valuations of stocks, bonds and loans are the highest since 1900,” they write, and this will lead to the two most likely scenarios: a protracted crisis or a sharp stock market crash, leading to a bear market.

In their analysis, they rely on a 60/40 investment portfolio, which means that 60% of the investment is in the S&P 500 Index and the remaining 40% in government bonds - a typical combination found in private pension funds, mutual funds, and also for a 401(k) retirement plan. In other words, these are the type of investments you're likely to rely on in retirement. Government bonds are commonly used as a security hedge because when stock prices fall, the bonds often retain their value.

“The current quantile estimate most closely matches the indicator of the late 20s, which ended with the Great Depression.”

This long rise since 2009—nearly 9 years—follows the same pattern that occurred just before the Great Depression of the early 20th century, and the Goldman Sachs team says:

“The favorable macroeconomic backdrop has boosted asset returns, leading to a broad-based bull market, both due to and despite the fact that inflation in the real economy has been negligible. As a result, relative to previous years, the value of all types of assets has increased, which leads to a decrease in the potential for profit and diversification, in addition, inflated values ​​increase the risk of drawdowns simply because the buffer that absorbs market shocks is reduced. The average quantile valuation for stocks, bonds and loans in the United States is 90%, an all-time high. While stocks and debt were more expensive in the tech bubble, bonds were comparatively attractive. The current quantile estimate most closely matches the indicator of the late 20s, which ended with the Great Depression.

This is what the historical perspective looks like:

Critics of cryptocurrencies argue that this market is built on sand and does not have a solid foundation to support incredibly inflated prices. But the tokenization of gold led to the emergence of gold-backed cryptocurrencies. The emergence of real value in digital coins pulls the rug from under critics.

The cryptocurrency market is experiencing rapid growth. The price of Bitcoin has already broken through the $7,000 mark, andcosts more than $300 with a capitalization of about $30 billion. You can also recall Ripple and other cryptocurrencies that have emerged in different parts of the world.

Considering the latest advances in blockchain technology, it is safe to say that this market has a bright future ahead of it. Individuals, corporations and even governments of some countries are showing keen interest in the opportunities that the cryptocurrency market offers. Indeed, cryptocurrencies have literally burst into financial markets, and many experts see them as the future of payment systems.

Lack of material value of cryptocurrencies

But critics of cryptocurrencies argue that there is no real basis to support such inflated prices. The market capitalization of Ethereum is around 30 billion, and Bitcoin is over 100 billion US dollars. This is more than the market capitalization of such powerful global corporations as BHP Billiton, Morgan Stanley and Goldman Sachs.

Most opponents of cryptocurrencies becoming the main means of payment in the future base their arguments on the fact that there is no single regulator in this market. Others believe that this market will soon collapse as cryptocurrencies have no material value.

In the case of traditional currencies, central banks hold reserves of gold bullion, economies, and other valuable assets that are designed to support the value of the respective country's currency. All this gives paper currency material value. Bitcoin does not have this, and critics believe that the price is dictated solely by supply and demand.

However, the technology on which cryptocurrencies rely has made it possible for other digital assets to emerge. One of the most interesting examples in recent years is the marking of gold bars. Traders are now able to trade gold tokens just like any other cryptocurrency.

But the most interesting thing about this is that this marking of gold contributed to the development of the cryptocurrency market. Gold has long been an important financial market instrument, and investors have the opportunity to trade it through gold-linked exchange-traded funds.

Now the cryptocurrency market, usingand the structure characteristic of “gold” ETFs, can offer investors new trading instruments called gold-backed cryptocurrencies.

It is quite natural that the popularity of the latter is steadily growing, and even many critics of cryptocurrencies have paid attention to them. Those who argue that the market's rapid growth is not backed by material value are missing their main argument, since gold-backed cryptocurrencies such as GoldMint, ZenGold and OneGram do.

For example, in the case of OneGram, each token is backed by one gram of gold, which is stored in a vault located in the duty-free area of ​​Dubai Airport. The same scheme is used in ZenGold, and GoldMint, based on a private blockchain, issues tokens backed by physical gold or exchange-traded funds at the current market value of this metal.

The emergence of gold-backed cryptocurrencies means that these trading instruments are gaining material value. And this fact can push even critics to.

Conclusion

In theory, the price of gold and all digital currencies depends on the value of various national currencies. But in practice, the main basis for valuation is the US dollar. The price of gold and cryptocurrencies, expressed in a particular fiat currency, depends on the strength (value) of that currency. Therefore, many experts consider gold and cryptocurrencies as two parallel instruments in which they can either invest or trade.

However, now, with the advent of gold-backed cryptocurrencies, the situation is changing. Both possibilities are combined into one unique tool that is suitable for both gold and cryptocurrency supporters.

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I recently gave a presentation to some corporate board members, and they had one major question. Why is overall gold demand weak?

They are smart people. They are successful, both professionally and in terms of investments. They even believe that one must own some amount of gold. But they were puzzled by the significant decline in demand for physical metal. They had some ideas, mostly correct, but their main concern was whether they were underestimating some critical factor that was causing other investors to ignore gold.

Their reaction was especially interesting. When they understood the reasons for the decline in physical demand, they instinctively concluded that they needed to buy more gold. Now.

See if you come to similar conclusions after reading my presentation...

Why is demand for gold weak?

Demand for physical metal has fallen for several reasons, but here are perhaps the main ones.

1. Trump. Since Donald Trump became president, purchases of American Eagles decreased by 60% (gold, silver, platinum and palladium).

Obviously, after Trump's victory, some investors felt less need for gold.

2. Cryptocurrencies. Some of the money that could have been invested in gold is instead going into cryptocurrencies. The amount is almost equal to new gold reserves for the year.

Because of this, the amount of gold and silver purchased decreased.

3. Growing stock markets. Why would the average mainstream investor, both retail and institutional, buy gold with all the hype?

Even board members were surprised to see how many new highs each market had made since the beginning of the year (and that number had increased since my presentation).

4. Arrogance. This chart is from CNN Money shows the VIX (Volatility Index), a general measure of fear in the market. As you can see, over the past 5 years it has dropped by almost a third and remains near record lows.

5 year change

If you have little fear, then you probably think that you don't need much gold.

Why are these reasons not enough?

I have pointed out why these are all actually reasons to BUY gold.

1. Trump: Not all policies will be successful (no president has accomplished all of his goals). The level of spending he expects will likely lead to inflation. The likelihood of geopolitical conflict is constantly growing.

2. Cryptocurrencies: Although some people have made money from cryptocurrencies, they are not a panacea, and you need to be careful:

• A. By any measure, cryptocurrencies are in a bubble. Every day a new cryptocurrency appears, or even more than one. The growth rate and rising prices are unsustainable. History clearly demonstrates that all bubbles burst.

• b. Cryptocurrencies are still speculative in nature. There are currently 1,147 cryptocurrencies in existence (as of October 2nd), and only a small percentage will ultimately succeed. In addition, prices are now too volatile for them to enter into widespread circulation.

• V. In most major economies, it is difficult to trade cryptocurrencies legally. China has banned exchanges (and at the same time is launching oil futures contracts exchanged for gold).

• d. Government regulation is almost certainly coming. The use of blockchain is likely to increase, but this will inevitably lead to more government intervention. Look at the response of government agencies after the first serious reports of money laundering or terrorist activity. By and large, this will eliminate the anonymity of cryptocurrencies.

• d. Finally, cryptocurrencies will not replace gold. Among other reasons, they simply don't have the market reach to do so. Here is a comparison of the value of all aboveground gold stocks (at $1,250) and the market capitalization of all currently existing cryptocurrencies.

Market capitalization of gold and cryptocurrencies

Trillion

Gold (left column), Cryptocurrencies (right column), Cost of 1,147 cryptocurrencies

Sources: LBMA, CoinMarketCap

The cryptocurrency market may still grow, but don't forget that it took gold 3,000 years to reach this level. Cryptocurrencies cannot compete with this.

3. Stock markets are overvalued. The fact that stock markets have made so many new highs in nine months is enough reason to play it safe. And the risk of a crash increases as the bubbles get bigger.

In comparison, gold is negatively correlated with stocks and is therefore an ideal hedge against inflated stock prices. Additionally, both gold and silver are undervalued, with gold remaining 32% below its 2011 high and silver 65% below its 2011 high. Insurance is now cheap.

4. A crisis is inevitable. Our research shows that monetary changes are coming, always accompanied by economic turmoil, as well as a huge loss of purchasing power in the currencies used. And that doesn't even take into account the inevitable collapse of the stock, bond and real estate markets and the inevitable recession.

The best hedge against these events is gold. This metal can equally become both an offensive investment to make a profit and a defensive hedge to protect assets.

Catalysts present

The need to have a lot of gold now is obvious.

Stock markets are at all-time highs	Correction is inevitable, it's only a matter of time. This can be significant given the size and duration of the run.
The average price of real estate in the United States now exceeds the level of the 2006 bubble.	Real estate is overvalued again. In 2008, we learned that real estate values ​​do not rise forever.
Inflation is close to historical lows	There is a high risk of higher inflation. This is the purpose of the Federal Reserve.
Bonds are in a 36-year bull market	Bonds have interest rate risk, inflation risk and, in the event of a crisis, default risk.
Nominal debt reaches extreme levels	Debt is a drag on growth. It can also lead to and worsen a crisis.
The next recession is inevitable	We are now in the third longest economic expansion since World War II.
Europe, China and Japan are still printing money	This signals that economies are not as strong as we are told.

The corporate board members I met decided to buy more gold. The risks in the financial system are clearly high, and gold is the best hedge against them. They also like that it is undervalued relative to most other asset classes.

As with finance, the distribution of gold is not even, and some countries have significantly more resources than others. From relatively unknown Uzbekistan to one of the world's largest gold miners, South Africa, mining tens or even hundreds of tons per year is not a fantasy, especially when it comes to the countries on this list. It's time to get acquainted with the ranking of countries that produce the largest amount of gold per year.

Uzbekistan - 90 tons

Uzbekistan is one of only two landlocked countries bordering landlocked countries in the world, but that doesn't mean it doesn't have important natural resources (although there are definitely problems with exporting them ). This country took tenth place in the ranking of the most gold-mining countries, as about 90 tons of gold are mined here per year. Most of the gold that is mined here is then nationalized, and it belongs to the Navoi Mining and Metallurgical Combine.

Indonesia - 100 tons

While you can find the largest open-pit gold mine in the world in Uzbekistan, the record for the largest gold mine belongs to Indonesia. We are talking about the Grasberg mine, where 19 thousand people work. Unfortunately, it is also considered one of the most toxic places in the world. Each year, this mine releases about a thousand tons of mercury into the atmosphere in addition to the fact that 100 tons of gold are mined here annually. People who live near this mine eat fish that contain twice the recommended amount of mercury, meaning that gold mining is an extremely harmful process for the mine workers and those who live nearby.

Ghana - 100 tons

Ghana was once known as the Gold Coast for its abundance of metals. In 2011, 100 tons of gold were mined here, but the gold reserves are gradually decreasing, and today Ghana's gold reserves are estimated at only 1,400 tons. The gold mining industry accounts for about five percent of the country's GDP, and mined minerals account for 37 percent of the country's exports. Ghana is the second largest gold producer in Africa, second only to South Africa.

Canada - 110 tons

Ah, Canada, land of snow, oil and precious metals. Most of Canada's gold comes from Ontario, specifically the Red Lake mine. Canada is so patriotic about its own gold that you can purchase a Canadian gold coin for just a few hundred dollars. However, you need to hurry because the country's gold mines are among the smallest among the countries on this list.

Peru - 150 tons

Peru is the largest gold-producing country in Latin America and only the second largest in all of America after the United States. Although the country receives some monetary profit from gold mining, the process has a negative impact on the environment. Over the past decade, gold mining in this country has increased by 400 percent, and this has had an extremely negative impact on the Peruvian Amazon. The problem with Peruvian gold mines is that most of them are located on top of mountains, so the mountains themselves and the surrounding land are negatively impacted.

South Africa - 190 tons

The country that produces the most gold on the African continent is South Africa, receiving about 190 tons of gold per year. The most striking fact about gold mining in South Africa is that the country still has about six thousand tons of gold in reserve. In addition, until 2006, this country was considered the largest gold miner in the world, and although it still remains in a high position, its operating efficiency is not the highest. Gold mining is one of the key driving factors allowing South Africa to actively participate in the global economy.

Russia - 200 tons

It is not surprising that Russia got a lot of gold, since it occupies approximately one-sixth of the entire world's territory. More than five thousand tons are still in reserve, much of it has not yet even begun to be mined, particularly in eastern Siberia, but Russia has already begun importing gold to quench its thirst for the shiny metal. For example, in 2012, the country imported approximately five percent of gold to replenish its bank reserve, which stands at about 900 tons. Whether the metal is in a jar or underground, Russia definitely loves gold.

USA - 237 tons

Russia has been surpassed by its Cold War adversary, the United States, which currently ranks third in gold production in the world. Although the gold mines are concentrated mostly in Nevada (near Las Vegas) and Montana, most of the gold is located in vaults near New York, Fort Knox and other places. More than eight thousand tons of gold are stored in these vaults, owned by the Federal Reserve System and the Treasury Department. In total, the United States has approximately the amount of gold that corresponds to 75 percent of the world's gold reserves.

Australia - 270 tons

The miners of this country have been constantly working in barren soil for a long time to obtain an impressive amount of gold and take second place in this ranking. Gold production in Australia each year is about 270 tons. Two-thirds of this comes from Western Australia, from the goldfields around Perth. The continent's largest open-pit mine, called the Golden Mile, supplies the largest amount of gold for export, which brings Australia about $14 billion a year.

China - 355 tons

China ranks first in this ranking, as it does in many other rankings. This country produces about a third more than its closest pursuers from Australia. However, in addition to producing the most gold, China is also the world's top consumer of gold, which is fitting for a country that has lifted hundreds of millions of people out of poverty. Most of the gold mines are located in Shandong province, located between Beijing and Shanghai.

The MSCI All Country World Index jumped above 456 points. Thus, the capitalization of the global stock market has grown to $50 trillion. This index includes shares of 23 countries in the developed world and 23 countries in the developing world.

Capitalization of the global stock market (trillion dollars)

Source: Twitter David Ingles

Of the $50 trillion, about $20 trillion comes from the US stock market, equivalent to 40%. At the same time, the nominal volume of US GDP at the end of 2016 amounted to 18.9 trillion dollars or 26% of the world economy. That is, the United States still remains the financial capital of the world and neither Great Britain nor China have yet come close to them.

Warren Buffett's famous indicator indicates that the value of all American companies is about 125% of GDP, which is 4 percentage points lower than it was in the first quarter of 2015. It turns out that, despite the fact that American indices are churning out record after record, they still have room to grow.

Warren Buffett indicator

Source: Federal Reserve Bank of St. Louis

Summary from Invrstbrothers

Let us recall that during the era of the .com bubble, the value of all US companies was one and a half times greater than the volume of the American economy, after which it collapsed to 70%. Since the beginning of the 2000s, the Buffett Indicator has been at a level of 100% of GDP, which is clearly less than today’s indicators, therefore, in our opinion, investing your money in American indices is quite risky; it is better to find interesting corporate ideas that are still present On the market.