Pension funds use gold as bond hedge weakens
For pension funds wary of mining equities because of commodity-price swings, bullion provides exposure to the gold sector without taking on the company-specific risks of owning miners.
Pension funds are increasingly turning to gold as a hedge against bonds, according to the World Gold Council. Investors are seeking protection from inflation, market volatility and the declining diversification benefits of bonds. The trend began in 2020 and has been maintained by pension funds in the Netherlands, United States, Britain and Australia, with investments ranging from 2% to 5% of their portfolios.
In the Netherlands, the €7.7-billion Pensioenfonds PDN introduced gold positions in October 2020 and maintained them until April 2021, when they allocated 5% of their portfolio to the precious metal. The decision was influenced by a 2020 asset-liability study that identified diversification benefits and risk reduction without compromising expected returns. The study was conducted amid falling German government bond yields below zero and concerns about inflation due to pandemic-era monetary and fiscal measures.
In the United States, the Fairfax County Retirement Systems has about 3% of its $6.2-billion portfolio invested in gold through futures. The fund began buying gold in 2020 due to the pandemic and associated monetary stimulus, which raised concerns about inflation. By using futures, Fairfax maintains its growth asset exposure while hedging against inflation and market stress. Gold also tends to move inversely to risk assets during periods of volatility.
Britain's Now: Pensions Master Trust, with more than 2.5 million members and £8 billion under management, introduced gold futures into its alternatives portfolio in April 2021. The fund currently holds about 2% of its assets in gold, primarily to diversify a portfolio dominated by listed equities and fixed income.
Australia's NGS Super has maintained a gold allocation since June 2020, with about 3% of its portfolio invested in the metal. The fund considers gold a useful addition during periods of volatility and inflation, as well as periods of currency debasement.
While the cases of these pension funds using gold as a hedge against bonds vary, they all demonstrate a persistence in maintaining gold positions over several years.
Written by urgent.news from Mining.com's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
