Pension Funds Join the Gold Party—Things Are about to Get Interesting
The comments below are an edited and abridged synopsis of an article by Jeff Clark
Today, institutional participation in the gold market is minimal. But with interest rates near zero, there are signs that this is changing. The Ohio Police and Fire Pension Fund, for instance, has announced that it will allocate 5% of its assets to gold.
This follows on the heels of other institutional investors that bought gold or silver in Q2, but it’s the first major pension fund this year to publicly announce that it has entered the gold market.
The fund has $15.7 billion in AUM, and a 5% allocation equates to over $750 million at today’s price. That’s roughly 2.5% of all the new gold brought into circulation last year for investment—from one fund.
Two things make this interesting: First, Ohio is only the 7th most populous US state. And this fund is only one of eight similar public pensions in that state alone. All kinds of cash from these sorts of entities could enter the gold market.
Second, this is a traditional money manager. For it to enter the gold market signals a shift. Pension funds are typically among the most conservative, long-term oriented investors; they don’t jump in and out of positions. This move from a large mainstream fund is likely to spur other institutional investors to consider making an allocation to gold, too.
Expect this trend to pick up steam, particularly in a ZIRP world. One of the most supportive conditions for gold is a negative real interest rate. When real rates are zero or negative, gold has historically performed well. The Fed and other central bankers have essentially signaled that they don’t plan to change this policy anytime soon.
The compelling angle here is that most pension funds currently have zero exposure to gold. That is likely to change.
On a global basis, pension funds have a lot of assets. At the end of 2019, the amount exceeded $46 trillion, which completely dwarfs the gold industry.
Even the total value of above-ground gold is puny compared to the amount of allocable capital the wide array of institutional investors have at their disposal.
Institutional investors are starting to enter the gold market. This is a new trend, one that could easily last for years. It’s a catalyst in and of itself, and one you want to make sure you’re in front of.