Another big investor, the ￥254.7 trillion ($1.58 trillion) Government Pension Investment Fund, Tokyo, in March called for information on asset classes that it does not have exposure to, including gold. However, a spokesperson for GPIF confirmed to P&I in August that the fund was not looking to incorporate gold at this time.
“Pension funds are looking more seriously at gold than they have done in recent years, and this relates to ongoing concerns about inflation," said John Reade, chief market strategist and head of research at the gold council, an international trade association. “The WGC has been diligently reaching out to pension funds to make the case for gold, and we've had some success, but we stay busy at what we're doing on that front.”
In Reade’s experience, some of the continental European pension funds, particularly Swiss institutional investors, have had a longer-standing association with gold ownership than in the U.K. and in the U.S. He sees “a certain irony” to Swiss pension funds being the most amenable to investing in gold because inflation in Switzerland has been low compared with other Western nations since the COVID-19 pandemic.
For example, the 40.5 billion Swiss francs ($44.7 billion) Swiss Federal Pension Fund PUBLICA, Bern, has an allocation to precious metals, including gold and silver, as a diversifier for its portfolio, according to a news release accompanying its 2023 annual report. That part of the portfolio, which is managed internally, amounts to 1.1 billion Swiss francs of assets, and, according to the annual report itself, returned almost 5% in 2023. Of the total, about 80% is invested in physical gold, the report added.
However, Reade said data shows that gold's role and performance amid rising inflation is not entirely clear cut — it's a hedge only against the right type of inflation. “It's not a panacea, it’s not a silver bullet. For example, gold and its performance is not a fantastic hedge for consumer price inflation.”
For example, during the COVID-19 pandemic, gold performed well in 2020, peaking at $1,987 an ounce on Aug. 1 of that year. In 2021 and 2022, when CPI was starting to rise worldwide, gold would not reach that price again — in fact dropping as low as $1,637 an ounce in November 2022, a month in the center of consecutive interest-rate hikes from both the Federal Reserve and the Bank of England in response to inflation standing at 8.2% and 11.1% in the U.S. and U.K., respectively.
“We got a lot of questions (across 2021 and 2022), because gold's got a reputation as inflation hedge. It is an inflation hedge, but not against CPI. It's a hedge against money supply growth. When, in 2020 as a response to COVID, central banks massively increased money supply, that's when gold performed. It goes up in anticipation of the inflation that comes,” he said.
Pension funds
Investing in the asset as a straight commodity is far from the only inroad for gold either, with the share price of gold mining firms Newmont Corp., Barrack Gold, and Kinross Gold Corp. all up on July 25, compared with the same date last year. However, equity prices have lagged the price of gold itself, showing an unevenness in the upward jump.
Gold as an exchange-traded commodity is another option that saves having the physical asset itself on the books, which the investment criteria of many pension funds rules out. The iShares Physical Gold ETC is up 21.95% between June 30, 2023 and June 30, 2024, and the Invesco Physical Gold ETC is up 21.7% for the same time period. This ETC rise largely tracks with the gold price itself, which rose 22% in this time.
Another pension fund with an allocation to gold is the $202 billion Teacher Retirement System of Texas, Austin, where Shayne McGuire is the portfolio manager for the Emerging Markets Fund and the Gold Fund. Founded in 2009, the TRS Gold Fund was the first of its kind among U.S. pension funds, although less than 1% of the pension fund's assets are invested in the precious metal.
"Our holdings in gold are mainly held via exchange-traded funds, as with the pension fund's rules we are not allowed to hold the physical asset. We will also hold gold via futures," McGuire said.
Geopolitics and de-dollarization
But it's not just the perceived inflation protection that gold offers that has investors interested.
McGuire said gold can act as a diversifying asset. He points to the fact that for every year since 1971 in which the S&P 500 has been down more than 10%, gold has been up without exception.
Added Ruffer's Alexander Chartres: “The bottom line is gold can be a powerful portfolio diversifier, acting as protection against both rising inflation and also geopolitical shocks.''
"As the world becomes more inflation-prone and more shock-prone, both of those things will increase gold's value,'' said Chartres, a fund manager at U.K. investment manager, which had approximately £22 billion ($27.8 billion) AUM as of July 1.
Chartres contrasts gold’s position to equities, which he believes “typically struggle” in the scenario he lays out, with their valuation multiples likely to fall in the wake of such shocks.
Such a shock may come from geopolitical turmoil such as tensions in the Middle East and the ongoing war in Ukraine, factors which have pushed the price of gold past even its 2020 peak to record levels.
Another recent phenomenon has been de-dollarization, in which central banks reduce their reliance on the dollar as a reserve currency and push toward an asset such as gold instead. Developing countries across the globe express this view by gathering gold resources.
According to Iain Cunningham, head of multiasset growth at Ninety One, an investment manager overseeing £128.6 billion in assets as of June 30, in recent years, the U.S. government has chosen a more protectionist path, coupled with a "very loose fiscal stance," positions that will likely be amplified in the coming years if a Trump administration returns.
With this trend in mind, a Trump victory would likely drive the U.S. debt crisis and subsequently, the de-dollarization trend, pushing developing countries further toward gold. Cunningham said: “In recent years, the U.S. has chosen a more protectionist path, coupled with a very loose fiscal stance—all of which will likely be amplified in the coming years if a Trump administration returns."
“Nations are diversifying reserves away from U.S. dollars, over fears that they can be weaponized against them. Some estimates point to gold holdings in international reserves having close to doubled over the past decade as a result.”
The UBS Annual Reserve Manager Survey, published in June and surveying 40 central banks managing a significant proportion of the world's $12 trillion FX reserves, noted a trend toward more diversification of reserves resumed after a pause between 2021 and 2023. Government bonds and green bonds were asset classes that central bank managers wanted to own more in the future, followed by equities, and then gold.
“If you look at who is buying gold at the moment, the top countries are those such as China, Poland, Singapore, India, Libya, Turkey, Iraq, Qatar, Oman," said Massimiliano Castelli, head of strategy for global sovereign markets at UBS Asset Management, which had $1.1 trillion in AUM globally as of Dec. 31.
"There is this emerging split between the central banks in emerging markets which have become net buyers of gold, and the central banks in advanced economies which have not been jumping on this wagon," he said, mentioning Germany as one nation that is even selling small amounts of its reserves.
According to Castelli, a reason for the disparity between the gold-related behaviors of emerging markets central banks and developed markets is that emerging markets are more susceptible to the "weaponization" of foreign exchanges, as was seen with the freezing of certain assets in the Central Bank of Russia following that nation's invasion of Ukraine in 2022. Gold is seen as an asset that might avoid such sanctions.
Max Belmont, portfolio manager of the gold strategy at First Eagle Investments, a U.S. based manager with $138 billion in assets under management as of June 30, also identified key geographic swings in the central bank-related interest in gold: “China and further countries to the global East are opening their economies. Because of the natural progression that they're under, these central banks are coming off relatively low levels of gold holdings when it comes to reserves, and are looking to expand.”
