Pension funds use gold as bond hedge weakens

Gold is finding a durable place in some pension-fund portfolios as investors look for protection from inflation, market shocks and the weakening diversification benefits of bonds, according to the World Gold Council.

The examples aren’t new investments. Funds in the Netherlands, United States, Britain and Australia established positions mostly between 2020 and 2021, but have maintained gold exposure of about 2% to 5% through physical metal or futures, according to a report issued Thursday.

“Gold has received increased attention from some pension funds as they reassess portfolio construction against a backdrop of geopolitical tensions, inflation shocks and a less reliable equity-bond correlation,” the council said.

For pension funds wary of mining equities because of commodity-price swings, permitting, operational and geopolitical risks, bullion provides exposure to the gold sector without taking on the company-specific risks of owning miners.

Bond break

Government bonds have traditionally provided diversification when risk assets came under pressure, but the correlation between bonds and equities has increased significantly in recent years, the council said. U.S. Treasuries have remained positively correlated with equities since 2022, while gold has shown a more stable correlation profile.

That shift echoes gold’s recent bond break, with bullion more than doubling since early 2022 even as U.S. bond yields climbed, a divergence investors at the recent Precious Metals Summit in Beaver Creek said may signal gold is regaining a monetary role.

Gold has also tended to become more negatively correlated with equities during severe stock-market selloffs, strengthening the argument for holding it as a portfolio diversifier rather than simply as a bet on a rising bullion price, the council said.

Netherlands

The €7.7-billion (US$8.67-billion) Pensioenfonds PDN in the Netherlands began buying gold in October 2020 and completed the purchases in April 2021 to reach a 5% allocation.

The investment followed a 2020 asset-liability study that identified diversification benefits and the potential to lower portfolio risk without reducing expected returns. The study came when German government bond yields had fallen below zero and pandemic-era monetary and fiscal measures were raising concerns about inflation, the council said.

PDN funded the investment by cutting its government-bond exposure by 10%. Half of the proceeds went into physical gold and the remainder into equities, real estate and infrastructure.

In the U.S., Fairfax County Retirement Systems holds about 3% of its US$6.2-billion portfolio in gold through futures. The Virginia funds began investing in gold in 2020 in response to the pandemic and associated monetary stimulus, which heightened concerns about inflation.

Fairfax continues to regard gold as an inflation hedge while also valuing its tendency to move inversely to risk assets during periods of market stress, the council said. Its use of futures allows the remainder of the portfolio to remain invested in growth assets.

Britain

Britain’s Now: Pensions Master Trust, with more than 2.5 million members and over £8 billion (US$10.6 billion) under management, made its first investment in gold in April 2021.

It now has about 2% of total assets in gold futures within an alternatives portfolio that also includes industrial metals, carbon credits and high-yield investments. The fund uses gold mainly to diversify a portfolio dominated by listed equities and fixed income, the council said.

Australia’s NGS Super has maintained an allocation to gold since June 2020 and currently holds about 3%. The fund uses gold alongside government bonds and other defensive assets as part of a strategy aimed at making its portfolio more resilient during heightened volatility and equity downturns.

NGS also considers gold useful during periods of inflation and currency debasement, the council said.

The case studies don’t point to a common target for pension-fund gold holdings. Funds use the metal differently depending on their funding position, governance, risk budgets and investment philosophy.

The four cases don’t point to a standard pension-fund allocation. Their common feature is persistence: positions opened during the pandemic remain in place five or six years later.