By Vince Heaney
Published: March 13 2011 10:00
Can you have too much of a good thing? If the thing in question is gold, the answer is “yes”, according to De Nederlandsche Bank, the Dutch central bank. Gold has been in an established bull trend for several years, but the DNB recently went through the courts to order the Dutch glassworkers’ pension fund (SPVG) to sell the vast majority of its 13 per cent allocation to gold.
The glassworkers’ case turned on the distinction between gold as a commodity and as a monetary asset. The court disagreed with the fund’s argument that gold was a form of money and upheld the central bank’s argument that such a large allocation to a volatile commodity was “inconsistent with the interests of the fund’s participants”.
In practice gold shares characteristics with both monetary assets and the underlying supply and demand trends arising from its industrial and jewellery use.
“We believe the price of gold will always be influenced by a combination of both factors, with supply and demand characteristics providing a floor to the price and monetary characteristics dominating in periods of stress,” says Simon Fox, principal at Mercer, the consulting group, in a December 2010 guide to investing in gold.
From a supply perspective, the World Gold Council highlights that recent new discoveries of gold have been scarce. Meanwhile, rapid industrialisation in China and India is underpinning both industrial and jewellery demand, as emerging market populations, which have a high propensity to save, become wealthier.
The biggest shift, however, has been in central bank behaviour. “Central banks have been net sellers of gold for the past 21 years, selling on average about 400 metric tonnes per year,” says Marcus Grubb, managing director of investment for the World Gold Council. “In 2010, central banks as a group were net purchasers of 87mt. A swing of almost 500mt in demand is a big factor in a market with annual mine production of 2500mt.”
But it is renewed interest in gold as a monetary asset that underpins much of the recent focus on the precious metal. With real interest rates negative, the opportunity cost of holding non-interest bearing gold is currently less of an issue.
Meanwhile ongoing concerns regarding systemic risk to the financial system and the possibility that financial authorities may adopt inflationary policies to deal with their debts, thereby debasing their paper currencies, are leading investors to view gold as an inflation hedge. The potential risks of sovereign debt defaults, a eurozone break up and the end of the dollar’s reign as the dominant global reserve currency all add fuel to the fire.
Given its low correlation to many other assets, gold also offers diversification benefits and the potential to hedge against the extreme (tail) risks contained in the more negative economic scenarios.
“Any sensibly designed portfolio should contain some hedges against extreme, or tail risk,” says Alasdair Macdonald, head of investment strategy at Towers Watson, the consulting group.
“You can potentially make an argument for gold in that category. Historically people have held US treasuries and dollars when there has been a flight to quality.
“But if the risk you are concerned about is a dollar crisis, then you don’t want to hold dollar assets, while euro or yen assets are not without their drawbacks either.”
There are dissenting opinions. Kevin Gardiner, head of investment strategy at Barclays Wealth, sees no case for owning gold or silver.
“Investors have focused on them because they think a big surge in inflation is coming and/or the banking system is in danger.” Mr Gardiner sees no need to hit either of those “panic buttons”.
He is particularly sceptical of the value of pension funds owning gold, or other commodities. While a balanced basket of commodities is a sensible part of diversified portfolios for wealth management clients, the lack of a cashflow from commodities means “they cannot legitimately be used as a hedge for long-dated liabilities [of pension funds]”.
The Dutch pension fund, SPVG’s relatively large exposure to gold is unusual for an institutional investor. The court case, for example, cited the average Dutch pension fund’s exposure to all commodities, not just gold, as 2.7 per cent.
This far lower exposure is borne out by other sources.
“Very few of our clients have an explicit allocation to gold, although some will have an implicit exposure through allocations to commodity indices or equity portfolios, which may hold gold mining stocks,” says Alasdair Macdonald, head of investment strategy at Towers Watson.
“Among those that have an allocation to commodities, their exposure to gold will only be a few per cent of a 1-2 per cent overall allocation.”
In a research report last December, Fredrik Nerbrand, global head of asset allocation at HSBC, calculated exposure to gold from a top-down perspective.
The total size of global equity markets is $41,500bn according to Datastream, while the fixed income markets total $91,200bn according to data from the Bank for International Settlements.
Compared with these, the total gold market is worth approximately $1,100bn, but investable assets, such as exchange traded funds and gold coins and bars represent only about 19 per cent of the total.
“This gives gold a weighting of only 0.14 per cent in our investable universe,” writes Mr Nerbrand, who suggests gold is over-talked but under-owned.
Exposure to gold, however, might increase. Last April, the annual European institutional asset allocation survey by Mercer found many schemes were taking action to protect themselves against inflation by increasing exposure to inflation-sensitive assets, rather than traditional inflation-linked bonds. “Whether gold does or does not have any suitability as an inflation hedge is dependent on the view of gold being or not being a monetary metal and whether inflation resulting from currency debasement is the type of risk against which protection is desirable,” says Simon Fox, principal of Mercer.
So how much gold would a fund need to gain these benefits?
Research by the World Gold Council suggests an optimal allocation to gold is between 4-10 per cent depending on portfolio currency and risk profile. HSBC has a 15 per cent weighting for gold within its global asset allocation portfolio, which it says does not add to overall portfolio volatility, while a smaller weighting would be insufficient to hedge against tail risks.
The difficulty, however, is that tail risks are by their nature difficult to quantify. Using a model to determine what to hold in circumstances when the model does not work well will inevitably be imprecise.
Institutional asset allocators are unlikely to rush to increase their exposure to gold, but, according to Towers Watson, it is an active area of debate following the financial crisis.
“Over the very long term the value of gold relative to goods and services or paper money has remained constant,” says Mr Macdonald. “Taking the costs of storage and insurance into account, gold offers a negative long-term real return, so I struggle to see a role for gold as a strategic allocation. But I can see a case for gold continuing to do well in the short term.”
Gold often sparks strong emotions among its advocates.
At the far end of the spectrum, the court ruling obtained by the DNB, which holds 60 per cent of its own reserves in gold, has been seen as a move to minimise private ownership of value-preserving assets and comparisons have been drawn with US Executive Order 6102 of April 5 1933, which forbade American citizens from hoarding gold coin, bullion and certificates.
But it is not necessary to believe in the more conspiratorial theories to see the attractions of gold. After such a long bull run, the risk of a significant gold price correction cannot be ignored, but supportive supply and demand fundamentals, diversification attributes and inflation hedging potential suggest there is a place for gold in investment portfolios.
Copyright The Financial Times Limited 2011
0 comments:
Publicar un comentario