Gold is a long way from going “mainstream”, but there has definitely been a heightened interest in the store of wealth metal this year. More investment “professionals” are recognising the benefits of owning gold.
We recently reported on the news that Warren Buffet’s Berkshire Hathaway bought $565 Million of shares in the world’s second largest gold miner Barrick. https://goldsurvivalguide.co.nz/buffett-wrong-gold-loves-silver/
Another Indicator of a Broadening Interest in Gold
Last week we spotted an indicator of this broadening of interest in gold also coming to New Zealand. An article published in Stuff was titled: “Monday thoughts: Should you invest in gold?”
Authored by John Berry who is “chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. Pathfinder offers a range of funds which invest in shares and does not hold gold.”
Emphasis added there at the end. The article is hardly a resounding endorsement to buy gold. But from an institutional investor, it is still a change in tack from previous much more disparaging articles on gold.
We could point out some flaws in his argument on the benefits of owning gold – such as:
“Why buy gold? Some argue it is a good hedge against inflation. That is not necessarily true. Over the six years from 2012 to 2018 the price of gold in New Zealand dollars went backwards, yet there was positive inflation every year. Not a great hedge.”
However 2012 to 2018 was hardly a period of high inflation. 2-3% would have been about it. Gold is actually more closely correlated to negative real interest rates. A negative real interest rate is the nominal interest rate less the current rate of inflation. It just so happens that negative interest rates are often present in times of high inflation. But they can also be present in times like now, when (official) inflation is low, but interest rates are low too.
Read more on real interest rates here: Real Interest Rates vs Gold Prices – What Can They Tell Us About When to Buy Gold in New Zealand?
However, Mr Berry does conclude by saying:
“…gold can be a tactical asset because it doesn’t always follow equity or bond markets. Other markets might fall, while gold might rise.
Take for example the three years 2008 to 2010. New Zealand shares were down 6.4 per cent per annum, while gold went up 18.2 per cent per annum.
Gold has had an amazing run. Up 17.3 per cent in 2019 and 27.3 per cent so far this year. Despite this, it only very recently passed its previous peak in November 2011. For eight years you would have lost money holding gold.
Buffett recently stunned the market by reversing his view and buying US$565 million of gold shares.
Maybe even Buffett recognises that those long periods of no return followed by short periods of good returns can be useful. While there is no single right answer, a small allocation (say 5 per cent) to gold in times of heightened financial risk may add value to a diversified portfolio.”
We’d say 5% is pretty low in the current environment. (See this for more on how much gold you should own: What Percentage of Gold and Silver Should Be in My Portfolio? [2020 Update]).
But hey, at least Mr Berry is recommending more than zero!
New Zealand institutional investors have a long way to go though. We’d say it’s their fiduciary duty to hold some gold in their investors portfolios. But we’d hazard a guess that not much more than 1% would (if that).
Gold – Simply About Belief?
Then in Stuff yesterday was an article from two professors at the University of Western Australia:
It was pretty simple in its coverage of gold. Featuring such “profound” statements as:
“Why is gold a safe haven?
The simple answer is that it has worked in the past. Based on past experience in a crisis, people believe in the safe haven feature of gold and it works because they believe in it.”
The old “gold is only valuable because people believe in it” line.
But nonetheless, the point is that these media articles show the interest in gold is indeed rising. This will usher in more demand as more people start to understand the benefits of owning gold. This is likely boosting gold into the next phase of this bull market.
NZ Stock Broker Points Out Gold Has Been a Great Diversifier in 2020
We were recently also sent the below screenshot from a presentation by Craigs Investment Partners (hat tip to Hamish thanks). This table clearly highlights one of gold’s key benefits – that of a diversifier. This is interesting as it is by a New Zealand company, using New Zealand numbers, and comparing other New Zealand asset classes.
Further evidence that gold is starting to attract more attention here in New Zealand.
Dating right back to 1998, gold has had the most yearly “last places” in performance (a total of 6). Which is what the mainstream financial commentators like to point out. However all but one of these negative returns were in the low single figures.
However gold has also had 6 “firsts” since 1998. Which is also the highest of any of the asset classes listed. Something the mainstream financial institutions don’t seem to bother to mention.
Hedge Funds Are Realising the Benefits of Owning Gold
Globally the interest in gold is rising too. Hedge funds are upping their exposure as they realise the benefits of owning gold are starting to increase:
- Ray Dalio’s hedge fund Bridgewater Associates poured over $400 million into gold ETFs in Q2. He increased holdings in GLD (SPDR Gold Trust) from $600.6 million to $914.3 million, making it one of the largest investors in the fund and Bridgewater’s second-most valuable holding. The company also increased its holding in the iShares Gold Trust from $176 million to $268.4 million, making this investment its sixth biggest stake.
- Hedge funds Mason Capital Partners, Sandell Asset Management, and Caxton Associates all initiated new positions in GLD last quarter.
- The Reserve Bank of India (RBI) announced it plans to increase its gold reserves to 10% of its total reserves, from the current 6.5%. How much is this? The RBI has approximately US $540 billion in cash… 3.5% of that equals $18.9 billion, which equates to 9.45 million ounces… which is 56% of all the gold bought for investment last year.
- Though central bank gold buying this year is probably slower than 2019’s banner year, the central banks in Kazakhstan, Turkey, Mongolia, India, Cambodia, Qatar and Russia were all buyers last month.
- And then there was this big shocker… BlackRock, the world’s largest asset manager ($7.4 trillion AUM), was the second largest buyer of SLV shares in Q2, purchasing 5.4 million shares.
Pension Funds Also Adding Gold Allocation
US Pension Funds have also begun buying gold. The Ohio Police and Fire Pension fund announced it will allocate 5% of its assets to gold.
A 5% allocation is around $750 million of gold at today’s prices. That would equate to about 2.5% of all the new gold brought into circulation last year for investment. And that is from just one pension fund.
Bear in mind that total above ground gold equates to about $4.6 trillion. While global pension funds assets total over $46 Trillion. So if just 1% of pension assets look to move into gold, that would equate to roughly 20% of current above ground gold supplies. That will surely impact the price.
It might well be these moves are responsible for setting a new higher “floor” for the gold price right now.
Key Benefit of Owning Gold: Protection from Negative Interest Rates
Low interest rates and a lack of return elsewhere is the most common reason we hear for new buyers of gold getting onboard.
We’ve seen more headlines on this topic of how to invest in a low interest rate environment here recently too. Such as:
Generating income in a negative rates world. The hunt for yield is on again, with a vengeance. But how much risk will investors take to get it, and do they really understand what chasing high yield means for their hard-earned savings?Source.
What are we supposed to invest in now that interest rates have disappeared?Source.
There’s no mention of gold amongst the alternatives in either of those posts though. However the reader comments in the second article demonstrate there are some enlightened people on the interest.co.nz site. Gold gets a good mention in the discussion there.
Mainstream Interest is Likely to Increase Further
Our guess is that this interest in gold will only increase. Both in New Zealand and also around the world as well. Driven largely by low (and likely to become negative) interest rates.