Recently, gold broke past its all-time highs set in 2011. Many are convinced that the persistent COVID-19 crisis is pushing investors to turn to haven assets. This increased demand has, in turn, pushed the precious metal to new all-time highs. Gold is now in a price discovery phase and many experts believe that $2,100 is within reach now.
But, it is interesting to note that the record rally is fuelled by unlikely buyers. Gold has won over a wider fan base of private wealth specialists, insurance companies, and pension funds.
The managers who run long-term portfolios that hold trillions of dollars are now taking interest in gold. They are turning to gold in search of returns in a yield-starved investing landscape. The wider array of these buyers is one of the fundamental dynamics behind the latest rally that might soon take the precious metal to $2,000 an ounce.
As that happens, the traditional customers of gold in China and India remain in the sidelines. Several years ago, when bonds provided larger yields, most of the professional investors had minimal use for gold. A broad portfolio of bonds and stocks may generate a constantly reliable yield, and both of these assets would balance one another out whenever market downdrafts arise.
Gold on its part offers no income and it is hard to value. Also, it costs money to keep in storage. But currently, everything is changing and the ground has shifted.
With more than $15 trillion in debt offering negative yields and the Federal Reserve probably retaining rates near zero for a long time to come; some of the Wall Street investors are questioning the reasoning and wisdom behind owning bonds. They are turning elsewhere for assets to hedge against equity volatility.
A manager who focuses on asset allocation strategies for Pacific Investment Management Co. in London, Geraldine Sundstrom, said:
“Safe government bonds have always played a very important role as a portfolio diversifier and will continue to be, but we have to recognize that their potency is diminishing due to the low absolute level of yields. We need to diversify our diversifier and look for a haven beyond government bonds. Given Pimco’s view that rates will be kept very low for years to come causing depressed levels of real yield, gold feels like an appropriate diversifier.”
Pimco manages around $1.9 trillion in assets and it is far from alone. While writing a May note, Citigroup Inc. cited:
“new non-traditional investors in bullion, including insurance companies and pension funds as part of the fuel behind the rally.”
Swiss private bank Lombard Odier & Cie SA said last week that it added gold to its “strategic asset allocation.” A private bank managing money for clients, Arbuthnot Latham & Co., confirmed that it has acquired additional shares of gold mining firms as a proxy to the precious metal. The private bank manages money for trust firms and personal pensions according to Chief Investment Officer Gregory Perdon.
The chief market strategist at the World Gold Council, John Reade, said:
“There has been more widespread institutional ownership of gold than in previous rallies. Gold’s in the conversation now with much more investors than it was 10 or 20 years ago.”
Nevertheless, gold ownership among the professional class is seen to be considerably low. The cumulative value of investor positions in gold futures and exchange-traded funds (ETFs) is equivalent to a mere 0.6% of the $40 trillion in global funds. That data was obtained from UBS Group AG strategist Joni Teves. That position may easily double without the allocation looking extreme.
Reade, who previously worked as a manager at hedge fund Paulson & Co., reckons less than one in five institutional investors has an allocation to some form of gold. The chief investment officer at BlueBay Asset Management, Mark Dowding, stated:
“It’s odd why pension funds would want to buy gold. It delivers no income or dividends and it costs money to store. It also does nothing to match assets to liabilities.”
Gold Is Rising
The reason may be that gold just seems to do well in times of inflation or whenever equities stumble. These two scenarios seem to be within the realm of probability in the current environment. Spot gold prices have gained 29% in 2020 and traded at almost $1,960 an ounce on July 29.
A wider base interested in gold may also mean that if gold does suffer a correction, it is likely to get many investors waiting in the wings to buy. A portfolio manager at Mediolanum International Funds, Charles Diebel, said while referring to retail investors and jewelry:
“The lower real yields go and the weaker the dollar, the more attractive gold is. Normal buyers of gold wouldn’t be driving this. It would be long term investors looking for diversification.”