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Pension Fund Gold: Defined-Benefit Plans Look to Gold for Help in Optimizing Portfolios

Isaac Nuriani    |
Jun 21, 2024
  • All classes of institutional investors have embraced gold.
  • Thailand’s public pension fund adds gold as a hedge against possible “extreme volatility.”
  • Large swath of U.S. public sector pension funds expected to increase gold allocations.
  • Asset manager: Gold helps pension funds “avoid unnecessary risk.”
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By now, it’s likely you’ve heard that gold and silver have enjoyed a bit of upward momentum recently. 

That may be something of an understatement, actually. 

Since the end of February through yesterday (June 21), gold rose nearly 15%, to more than $2,300 per ounce.[1] Over the same period, silver rose 30%, to roughly $29.50 per ounce.[2] 

The performance of the metals is even more impressive when one considers the various headwinds they’ve faced through this period. Among the most prominent pertains to the interest rate climate. Not only have rates remained at 23-year highs since last July, but the prospect of rate cuts – which seemed far greater just a handful of months ago – has turned more elusive recently as a result of economic data suggesting inflation may continue to be “sticky” and otherwise problematic for some time to come. 

So, it’s not unusual to hear the word “resilient” used in connection with precious metals these days. And it is precisely that resilience which has seen gold gain favor with multiple classes of institutional investors of late. 

First and foremost are the central banks, which is something I talk about regularly in this space. Not only have central banks been net purchasers of gold since the financial crisis, but their purchase levels have been at or near record levels for the last two years.[3]  

In fact, according to just-released data from the World Gold Council, more than 80% of central banks said they expect their community to continue accumulating gold in the year ahead.[4]   

Another institutional investor class that’s turned to gold recently is the professional money manager, including hedge funds and asset managers. 

David Neuhauser of hedge fund Livermore Partners recently took a 20% position in gold, explaining, “With inflation well above trend and being extremely sticky, it doesn’t take a rocket scientist to figure out that gold could serve in a great capacity. We are in for a structural change in terms of inflation, and gold will be the metal to continue to find investors worried about monetary disorder, worried about monetary debasement.”[5] 

And, as it turns out, there’s yet another class of investor that appears to be making a quiet but deliberate shift toward gold: pension funds. 

You may know that pension funds are company-sponsored retirement plans wherein money is set aside for each employee and managed in such a way so that the collective amount is enough to pay workers a defined benefit when they retire. 

The stewardship of pension assets is a big deal, as you might imagine. Although employees are spared the burden of having to make retirement plan contributions on their own behalf, they also have no say in the management of the funds. Which means they’re required to put a great deal of faith in the ability of the pension fund managers to oversee the portfolio in a way that ensures there’s enough money to pay each participant his or her full benefit when they stop working. 

And in what has become an economic environment replete with uncertainty, it seems that devotion to good stewardship on the part of pension fund managers is prompting many of them to embrace gold. 

Let’s learn more about that…and start by reviewing Thailand’s Government Pension Fund, which has sought to offset weakness in more mainstream asset classes by taking a position in gold – and now finds that it’s poised to double its return over 2023. 

Uncertainty Concerns Drive $38 Billion Thai Government Pension Fund into Gold 

Thailand’s Government Pension Fund has concerns about the stability and performance of the mainstream assets in its portfolio, which is a familiar refrain these days. To address those concerns, fund managers have reallocated a portion of the portfolio into some decidedly non-mainstream assets. And one of those…is gold. 

According to Songpol Chevapanyaroj, secretary-general of the Thai pension fund, the conservatively invested portfolio will double its return this year over 2023. And the reason, suggests Chevapanyaroj, is the array of so-called alternative assets, including gold, the fund has seen fit to access this year. 

Saying those assets “will still be our good hedges for any excessive movements in financial markets,” Chevapanyaroj clarified his view that: 

“There will be more extreme volatility with ongoing geopolitical conflicts and the upcoming US presidential election.”[6] 

Pension funds, by their very nature, have a great deal at stake in terms of not only the assets they must oversee but also the number of people depending on them, and that’s certainly true in the case of the Thai Government Pension Fund (GPF). At present, the fund oversees roughly $38 billion on behalf of more than 1 million government workers.[7]  

The specific catalyst for the shift toward gold and other alternative assets appears to be the -1.5% return suffered by the fund in 2022, which was its first calendar-year loss since 2008.[8] Almost immediately, fund managers decided they had to start thinking “outside the box,” as the saying goes. 

Thailand’s Government Pension Fund is not the only such portfolio in the Far East so inclined, either. Recently, Japan’s Government Pension Investment Fund (GPIF) took a step toward possibly adding gold to its holdings with a formal request for information (RFI) on what it termed “illiquidity assets.” And while reasonable people can disagree on just how “illiquid” gold actually is, the yellow metal is one asset specifically named by the fund as one about which it would like to learn more. 

GPIF’s burgeoning interest in gold may be considered unsurprising, given its cited “Investment Principles,” including what the fund calls its “overarching goal”: 

“To contribute to the stability of the national pension system by securing the investment returns that it requires with minimal risk and from a long-term perspective, for the sole benefit of pension recipients.”[9] 

Notable, too, is that GPIF – the world’s largest pension fund with roughly $1.54 trillion in assets – sees “diversification” as its principal investment strategy: 

“Our primary investment strategy is diversification by asset class, region, and timeframe. While market prices may fluctuate in the short term, GPIF will take full advantage of our long-term investment horizon to achieve investment returns in a more stable and efficient manner, while simultaneously ensuring sufficient liquidity to pay pension benefits.”[10] 

Diversification is a perceived benefit of precious metals that remains highly prized throughout investor classes. For example, according to the World Gold Council’s 2024 Central Bank Gold Reserves Survey, more than 90% of central banks named gold’s capacity to serve as an “effective portfolio diversifier” as a relevant factor in deciding to own it.[11] 

To be sure, it’s not only large public pension funds based elsewhere that have decided there’s utility in gold as a hedge and diversification asset. It seems U.S.-based funds also have decided there’s potentially a great deal of portfolio value in owning gold during the current economic era. 

Analysts: 40% of U.S. Public Sector Pension Funds Expect to Increase Gold Exposure 

In a study conducted last year of 50 U.S. public sector pension funds overseeing a total of $1.3 trillion in assets, Ortec Finance – which specializes in helping pension funds optimize their portfolios – found that nearly 40% planned to increase their allocations to gold as a way to hedge against the impacts of inflation.[12] 

The same survey found that practically all of the pension funds are concerned about stagflation, defined as a high inflation and low growth occurring simultaneously.[13] Gold has been cited consistently through the years as an asset that can be helpful in stagflationary environments. In fact, a 2022 study by the World Gold Council found that over the last half-century, gold was the best-performing asset during historical periods of stagflation.[14] 

Marnix Engels, managing director of pension strategy at Ortec Finance, underscored the greater faith that U.S. pension funds appear to be putting in so-called “real assets” nowadays as hedge tools, saying: 

“More work is being done in terms of asset allocations with commodities emerging as the clear favorite for increased exposure in the year ahead and there are some lingering worries that the US economy will not achieve the soft landing of lower inflation and rising growth.”[15] 

“Pension plans need to manage their balance sheet effectively in order to achieve long-term objectives while dealing with short-term risks,” Engels added. “That includes identifying major risk sources such as stagflation as well as looking at future contributions and funding levels.”[16] 

“Achieving long-term objectives while dealing with short-term risks.” It could be said that this is the principal challenge faced by all classes of investors.  

On that note, it’s difficult to deny that pension funds have a great deal at stake, given the portfolio sizes and the enormous number of workers depending on their successful optimization. However, for the individual retirement saver depending on the viability of a single retirement plan, the functionality of that account is no less important, ultimately.  

Does that mean gold should be a consideration for him, as well? 

Let’s talk a little more about that as we close out this week. 

Gold Helps with the Avoidance of “Unnecessary Risk,” Says Strategist  

Yvonne Blaszczyk, CEO of metals-focused asset managers BMG Group recently had this to say about the role that gold can play in helping to optimize pension funds: 

“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.”[17] 

And yet despite being prized for millennia, one of the great ironies of gold is its accepted characterization today as an alternative asset, largely because it’s not made of paper. 

But as we’ve been discussing for some time, there does appear to be a macro shift, of sorts, taking place in the realm of asset exposure, one in which what was old is now new again. Central banks, hedge funds, and asset managers now are relying on gold to help keep their portfolios in the best shape possible. And it seems pension funds are doing the same.  

Does that mean acquiring gold – or silver – is right for individual investors? 

Admittedly, the move by institutional investors toward gold understandably seems to validate the yellow metal as a portfolio component. The trends might even prompt some individual investors to consider purchasing precious metals themselves…perhaps even through a tax-advantaged gold IRA (consult a qualified advisor on the potential tax implications of IRAs). 

There is no universal, one-size-fits-all answer to the question, however. Retail investors, in consultation with their advisors, will have to decide if metals are right for them in the way other classes of investors similarly have weighed the purchase of gold and silver. 

But even those who ultimately decide against owning precious metals may want to keep this in mind: If precious metals continue to have an ever-increasing priority throughout all investor classes, the trend potentially could exert a material change in the very structure of the financial system – one that sees gold return to “the center of the monetary stage,” as one analyst puts it.[18]  

And if that happens, the implications could be far-reaching…even for those who decide against owning any metals themselves. 

 

 

[1] CNBC.com, “Gold COMEX (Aug′24)” (accessed 6/20/24). 
[2] CNBC.com, “Silver COMEX (Jul′24)” (accessed 6/20/24). 
[3] World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 6/20/24). 
[4] World Gold Council, “2024 Central Bank Gold Reserves Survey” (June 18, 2024, accessed 6/20/24). 
[5] Yun Li, CNBC.com, “The biggest money managers are flocking to gold as inflation fears intensify” (April 18, 2024, accessed 6/20/24). 
[6] Anuchit Nguyen, Yahoo News, “Thailand’s $38 Billion Fund Says Gold to Counteract Weak Stocks” (June 14, 2024, accessed 6/20/24). 
[7] Ibid. 
[8] Ibid. 
[9] GPIF.go.jp, “Annual Report – Fiscal Year 2022” (accessed 6/20/24). 
[10] Jordan Finneseth, Kitco News, “Japan’s GPIF, the world’s largest pension fund, eyes Bitcoin and gold as diversification investments” (March 19, 2024, accessed 6/20/24); GPIF.go.jp, “Annual Report – Fiscal Year 2022.” 
[11] World Gold Council, “2024 Central Bank Gold Reserves Survey.” 
[12] Ortec Finance, “PRESS RELEASE: US public sector pension plans intend to build on inflation hedging success” (accessed 6/20/24). 
[13] Ortec Finance, “PRESS RELEASE: US public sector pension plans.” 
[14] World Gold Council, “Stagflation Strikes Back” (March 25, 2022, accessed 6/20/24). 
[15] Ortec Finance, “PRESS RELEASE: US public sector pension plans.”  
[16] Ibid. 
[17] David Kitai, Benefits and Pensions Monitor, “Gold is rising, what can it do for pension funds now? (March 28, 2024, accessed 6/20/24). 
[18] Willem Middelkoop, OMFIF.org, “Central banks and the revival of gold” (December 11, 2023, accessed 6/20/24). 

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