Managers who run long-term portfolios worth trillions of dollars are taking interest in gold as they search for returns in a yield-starved investing landscape.
The broader array of buyers is one of the key dynamics behind the rally to $2,000 an ounce, even as gold’s traditional customers in India and China remain on the sidelines.
In the past, when bonds offered heftier yields, many professional investors had little use for gold. A broad portfolio of stocks and bonds could generate a reliable yield, and the two assets would balance each other out during market downdrafts. Gold, which offers no income, is hard to value and costs money to keep in storage.
But now, the math has shifted. With $15 trillion in debt offering negative yields and the Federal Reserve likely holding rates near zero for the foreseeable future, some on Wall Street are questioning the wisdom of owning bonds and looking elsewhere for assets to hedge against equity volatility.
“Safe government bonds have always played a very important role as a portfolio diversifier and will continue to be, but we have to recognize that their potency is diminishing due to the low absolute level of yields,” said Geraldine Sundstrom, who focuses on asset allocation strategies for Pacific Investment Management Co. in London.
“We need to diversify our diversifier and look for safe haven beyond government bonds. Given Pimco’s view that rates will be kept very low for years to come causing depressed levels of real yield, gold feels like an appropriate diversifier,” she said.
Pimco, which manages $1.9 trillion in assets, is far from alone. In a May note, Citigroup Inc. cited “new non-traditional investors in bullion, including insurance companies and pension funds” as part of the fuel behind the rally.
Last week, Swiss private bank Lombard Odier & Cie SA said it added gold to its “strategic asset allocation.” Arbuthnot Latham & Co., a private bank managing money for clients including trusts and personal pensions, says it’s bought more shares of gold mining companies as a proxy to the precious metal, according to Chief Investment Officer Gregory Perdon.
“There has definitely been more widespread institutional ownership of gold than in previous rallies,” says John Reade, chief market strategist at the World Gold Council. “Gold’s in the conversation now with much more investors than it was 10 or 20 years ago.”
Even so, gold ownership among the professional class is viewed to be low. The total value of investor positions in gold futures and exchange-traded funds is equivalent to just 0.6% of the $40 trillion in global funds, according to UBS Group AG strategist Joni Teves. That position could easily double without the allocation looking extreme, she wrote in a note.
Reade, who previously worked at hedge fund Paulson & Co., reckons no more than one in five institutional investors has an allocation to gold.
“It’s odd why pension funds would want to buy gold,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “It delivers no income or dividends and it costs money to store. It also does nothing to match assets to liabilities.”
The allure may be that gold simply tends to do well during times of inflation or when equities stumble — two scenarios that seem within the realm of possibility in the current environment.
A broader base interested in gold could also mean that if gold does suffer a correction, it’s likely to find plenty of investors waiting in the wings to buy.
“The lower real yields go and the weaker the dollar, the more attractive gold is,” said Charles Diebel, a portfolio manager at Mediolanum International Funds.
“Normal buyers of gold wouldn’t be driving this,” he said, referring to retail investors and jewelry buyers. “It would be long-term investors looking for diversification.”