As you probably know, both gold and silver have a reputation as assets with the capacity to thrive during periods of economic uncertainty. This implies it can be a benefit to own precious metals during crises but not when a distinct economic upheaval is not in play. This reputation also could give the perception that gold isn’t suitable as a core savings asset for the long term.
But there are signs that view may be changing. Admittedly, many of those “signs” have come in the form of anecdotal evidence, such as the recent legislative push by some states toward permitting their reserve funds to be stored in gold.1
There also are results of a 2020 survey by data analytics firm Preqin that reveal 81% of savers expect to increase allocations to alternative assets over the next four years.2
I’ve mentioned previously, as well, survey results published in the New York Times last year that showed roughly half of all Americans had been “seriously considering” a gold purchase.3
But some of the best evidence up to this point that gold is moving toward becoming a mainstream asset can be found in a Greenwich Associates study completed in partnership with the World Gold Council (WGC). Among the study’s findings: 40% of institutional asset managers that do not own any gold presently plan to take a position in the yellow metal sometime in the next three years.4
This large anticipated, broad-based institutional allocation to gold in the near term potentially could have profound long-term implications for gold prices. Which means it might be a great buying opportunity for certain retirement savers right now.
In addition to the projected increase of gold ownership among institutional asset managers that don’t own any of the metal now, the study also revealed that 40% of institutional managers that DO own gold expect to increase their allocation in the next three years.
What’s an institutional money manager? It’s a company that guides the portfolios of entities such as mutual funds, pensions and insurance companies. The fact that it’s institutional managers who are so keen on buying – or buying more – gold through the coming years is why I find this news so compelling.
Institutional managers count their assets under management in the billions – even the trillions. And, as asset managers with that level of implied impact take a greater position in gold, it raises the possibility that these allocations could help sustain upward momentum of gold prices in the years ahead.
Notably, there isn’t any one single “driver” of gold prompting this greater affection for the metal on the part of institutional managers, as the study’s authors detail:
Despite mounting fears of inflation, our data suggest that the expansion of institutional gold allocations should not be attributed to any single factor. In fact, when institutional investors are asked to name the primary role that gold plays in their portfolios, diversification tops inflation-hedging by a comfortable margin. Many investors also look to gold for long-term risk-adjusted return enhancement. In light of those findings, it’s likely that any plans to expand gold allocations reflect institutions’ broader view of gold as an asset that can serve multiple constructive roles in a portfolio across a broad spectrum of market conditions [emphasis added].5
That’s actually pretty big news. Traditional financial institutions may have allocated to precious metals in the past, but many tended to discourage normal human beings from thinking of gold and silver as a “regular” asset.
So, does this broader view of metals by institutions mean worrisome inflation is not expected to be a factor in bigger gold allocations?
Not at all. Of the survey respondents who currently own gold, 61% did indicate that “inflation hedge” was a primary reason they do. And other research by the World Gold Council determined the price of gold increases an average of 15% during years when the CPI rises more than 3%.6 So inflation certainly is one reason so many institutional managers look upon gold with great favor.
But inflation is only one reason. Of those same survey respondents who own gold right now, 77% identified “diversification” as a primary reason for owning it. As an asset fundamentally uncorrelated with financial markets, gold’s potential to enhance the overall returns of long-term savings by helping to provide diversification has been a recurring theme of this blog for some time.7 And based on the Greenwich survey results, institutional money managers clearly see significant value in gold as a potential savings diversifier, as well.
Nearly a quarter of respondents who own gold now indicated “long-term return generator” as a primary reason to own it. I find that view among institutional asset managers to be particularly telling, given the degree to which the mainstream financial community historically has been dismissive of gold as a long-term asset.
But the fact remains that aside from cryptocurrency, gold has been the best-performing asset of the millennium so far, appreciating roughly 570% since January 2001.8
On that note, the study authors suggest there’s no shortage of institutional managers more concerned about the impact of chronically low interest rates on returns than they are about inflation.
“These investors could be betting that if inflationary pressures dissipate later this year, interest rates will remain low—an environment that could provide a tailwind for gold returns,” the study notes. As one pension manager told Greenwich, “Low interest rates make holdings of other risk-off assets (long bonds, bond-like stocks) less attractive than gold as a potential source of price returns going forward.”
Regular readers of this blog may recall last week I wrote about the possibility that persistently low and even negative real rates could prove to be a principal driver of gold prices through the foreseeable future. At least some of the world’s largest asset managers would seem to agree.
The results of this study are profound, in my view. They underscore not only the expectation of a chronically challenging savings environment going forward, but the strong belief among money management elite in gold’s potential to help mitigate the effects of those challenges.
These are all the reasons we may soon be seeing an institutional gold-buying surge. Much of the talk you’ll find about gold on the internet typically is concerned with its very-near-term prospects – tomorrow, next week, next month, etc. That has its place. But it also could inadvertently encourage retirement savers to miss the bigger-picture possibilities of an asset that already has shown itself to be a shining long-term stars of the millennium so far. Does this mean the current price of gold – now roughly 12% off its all-time high reached last summer – is a buying opportunity for retirement savers interested in longer-term potential? That’s their decision. But, in my opinion, it’s hard to understate gold’s potential for long-term price gains when it’s being increasingly warmly embraced by some of the world’s biggest asset managers.
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