Gold is rising, what can it do for pension funds now?

Experts weigh in on the role of gold in institutional portfolios and its capacity to deliver for members now

Gold is rising, what can it do for pension funds now?

Gold is quietly breaking records. In the past six months the yellow metal has risen by over 16 per cent, hitting all-time record high prices of as much as $2,170.16 per troy ounce. What’s particularly interesting is that gold, traditionally a hedge against a strong US dollar, is rising while the US dollar rises. This most recent rise in the price of gold and the somewhat unusual nature of the environment surrounding its rise may prompt some consideration of the role gold can now play in pension and institutional portfolios.

“The use of gold does vary,” says Sadiq Adatia, Chief Investment Officer at BMO Global Asset Management. “Sometimes it goes into a commodity bucket, sometimes its used as an inflation hedge or a hedge against the US dollar strengthening. There are even people who use it in their equity or fixed income buckets as well.”

Adatia explained that there’s been a bit of a break between the correlations with gold, which impacts how asset managers may be using it. Gold has been strong while the US dollar has also been strong. Adatia’s view as of now, therefore, is that gold can still function as a strong store of value and a hedge against volatility, uncertainty, and geopolitical risk.

Yvonne Blaszczyk believes that a wide array of circumstances should prompt pension funds to consider a physical gold allocation now. The President & CEO of BMG Group noted the growing calls from government and industry leaders for Canadian pension funds to allocate more assets domestically. If those calls manifest into real rules, pension funds will have to find sources of return that can fall outside of national categories. An allocation to physical gold would, in her view, provide that return stream while satisfying any new restrictions or mandates.

“Pension fund managers want to avoid unnecessary risk and when you look at gold you see something that has been a store of value for 5,000 years, and as pension funds look for long-term investment returns gold provides a nice synergy,” Blaszczyk says. 

The decision around the exact bucket or allocation to put any gold exposure in comes down to the investment strategy and policy of a particular pension fund. Adatia believes that the role asset managers want their gold exposure to play will dictate the nature and amount of their exposure. While each bucket has its own rationale, Adatia highlighted the logic of gold in the fixed income portion of the portfolio, acting as a capital preservation tool while traditional fixed income products remain somewhat more volatile.

The rising price of gold can be explained in part by an increase in demand from central banks. In an effort to hedge their exposure to the US dollar, or as a hedge against geopolitical risks, central banks are buying gold. We are also seeing a seasonal uptick in demand for the yellow metal, which tends to come around this time of year. At the same time, not much additional supply has made its way onto the market, pushing prices higher.

Blaszczyk added that a major international factor seems to be driving demand for Gold. The BRICS countries, she notes, have been vocal about proposing an alternative reserve currency backed by gold. While such a currency has not yet manifested, the acquisition of gold by BRICS countries, as well as speculation about that currency has driven prices higher. If that currency is launched, Blaszczyk expects gold prices to shoot up further.

While the changing relationship between gold and the US dollar is worth noting, Adatia still sees context and wider utility for the asset class. He notes, first and foremost, that these ‘rules’ don’t always hold true, especially given the economic circumstances we currently find ourselves in. Moreover, pension funds and other institutions should still be able to use gold to hedge against inflation and volatility as well as a source of downside protection. Gold has already been quite useful as recently as last autumn when it protected against more significant falls in equity markets.

Adatia and Blaszczyk also drove home the importance of Gold’s history in the context of pension fund strategies that are often typified by innovative exposures and unique products. Gold has a history stretching back thousands of years, with different dynamics in different scenarios. While many of the new areas pension funds have moved into over the past few years, like private equity and infrastructure, are experiencing some of their first real tests now, gold has track records across wide swathes of time. That history can provide some additional reassurance.