Last April gold investment analysts were excited to see a new institutional player enter the gold market. The University of Texas Investment Management Co. took delivery of nearly $1bn of gold bullion into a New York vault. The reason gold analysts were so interested was because large institutional players had been largely absent from their market and their huge purchasing power had therefore not had its potentially significant positive effect on the gold price.
The gold purchase by America’s second largest academic endowment was noted in case it was the start of a trend. Nonetheless, continued institutional bids into the gold market did not follow in great enough numbers to identify a compelling trend. Apart from last summer’s run to over $1,900/ounce, the gold price has not hinted at notably increased institutional buying of gold. Gold investors were left waiting and wanting.
However, the Financial Times reported some interesting news for those monitoring such a trend yesterday.
Okayama Metal & Machinery has become the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Initially, the fund aims to keep about 1.5 per cent of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer (CIO) Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk".
Pension funds and gold bullion
Traditionally pension funds have ignored gold due to their focus on yields. Japan is the world’s second largest pension market, and this move by Okayama Metal & Machinery is worth paying close attention to. Such a move into non-yielding assets becomes more palatable in a world of negative real interest rates where institutional investors are paying for the ‘privilege’ of holding government paper.
The fund’s aforementioned CIO appears to have talked his investment committee into a long term wider view of asset allocation. Mr Kiguchi had made the case that a lack of yield needed to be balanced against currency and default risk. Loose monetary policies and the durability of fiat currencies seemed to be on his mind when he commented: “from a very long-term point of view, gold may be one of the safe currencies”.
This point about long term asset allocation is one that…
