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 has been articulately made previously by Ben Davies of Hinde Capital. Mr Davies and Hinde Capital have also been observers of Japan’s potential in the gold market, and according to the FT, this potential may be morphing from latent demand into patent demand.
Mizuho Trust & Banking, a unit of Mizuho Financial Group, has begun to offer investment schemes allowing smaller pension funds to invest in gold… While few fund managers are counting on a crash in core assets such as Japanese government bonds, said Takahiro Morita, head of the Tokyo arm of the World Gold Council, a producers’ association, they were increasingly receptive to the idea that gold could act as a buffer against shocks. “Last year’s tsunami and the euro-zone debt crisis shows that it was wise to expect the unexpected,” he said.
Nomura, Japan’s biggest wealth manager, added a gold option to its monthly survey of 1,000 randomly selected retail investors in February. Every month since, gold has been ranked the third-most desirable addition to portfolios, well ahead of competing assets such as investment trusts, bonds or foreign securities.
Succinctly explaining recent performance across asset classes, Yoshio Kuno, Japan head of Newedge, the futures broker, argued that “If you look at assets over the past couple of decades, equity has been a loser, while fixed income offers tiny coupons. Gold is becoming an acceptable currency substitute.”
This news and sentiment out of Japan suggests further evidence of declining trust in fiat currencies to us, but is a wider trend of growing institutional demand for gold appearing?
Whales and the Gold Market
Recent SEC filings, reported by ZeroHedge, show other institutions participating in the gold market. Most of these names are familiar to gold market observers but some of them appear to be increasing their participation whilst others are new buyers.
Eton Park Capital, Paulson & Co., Pimco, Soros Fund Management, and the Teacher Retirement System of Texas all bought shares of the world’s largest gold exchange traded fund (ETF), known by its ticker of GLD, in the first quarter of 2012.
Within this Soros quadrupled his gold investment position compared to the previous quarter, Pimco and the Teacher Retirement System of Texas were also net buyers, whilst Eric Mindich’s Eton Park Capital was a new buyer with a purchase of 739,117 shares, having held no position in GLD at the end of 2011.
Large Buyers Need Liquid Gold Products
It is also worth noting the size of some of this participation. Investment by Okayama Metal & Machinery of $500m and Eton Park Capital of $110m is larger enough for these buyers to need a highly liquid gold investment solution.
Institutions that need to invest in regulated securities tend to look towards the largest ETFs, like GLD, as only these products are liquid enough to handle their buying and selling without inordinately affecting the price. This can be especially relevant for some pension funds that may be unable to take delivery of physical bullion as the University of Texas Investment Management Co. and David Einhorn’s hedge fund, Greenlight Capital, did.
Eric Sprott’s Physical Gold Trust and the Central Fund of Canada might be a structurally superior means of achieving gold, or precious metals ownership, but at the time of writing the Sprott Trust’s Net Asset Value (NAV) was less than $2.2bn and the Central Fund’s NAV was less than $4.8bn. This is compared to GLD’s current NAV of $63.5bn. Whales sized gold buyers need deeper liquidity and, regardless about opinions as to its suitability for gold investment, GLD has it.
Whilst the above institutional action in the gold market might not point to a firm trend of hot institutional activity it is worth paying attention to. Trends have to start somewhere, and whilst gold is not significantly held by institutions generally, the motivating concerns mentioned by Okayama Metal & Machinery’s CIO might be held more widely across the industry.
The move into gold by Okayama Metal & Machinery should be looked at in the same light as the University of Texas Investment Management Co.’s gold investment last year. For now we just hear a slow dripping sound as financial glaciers melt and capital begins to look for more secure homes and better collateral.
Central banks and pension funds buying gold bullion. Invest in gold like a professional in minute.