Gold’s record rally fueled by unlikely buyers
Long-term portfolio managers, usually aloof, take interest
Gold’s surge to an all-time high is winning over a wider fan base of pension funds, insurance companies and private wealth specialists.
Managers who run long-term portfolios worth trillions of dollars are taking interest in gold as they search for returns in a yield-starved investing landscape. The broader array of buyers is one of the key dynamics behind the rally to $2,000 an ounce, even as gold’s traditional customers in India and China remain on the sidelines.
In the past, when bonds offered heftier yields, many professional investors had little use for gold. A broad portfolio of stocks and bonds could generate a reliable yield, and the two assets would balance each other out during market downdrafts. Gold, which offers no income, is hard to value and costs money to keep in storage.
But now, the math has shifted. With $15 trillion in debt offering negative yields and the Federal Reserve likely holding rates near zero for the foreseeable future, some on Wall Street are questioning the wisdom of owning bonds and looking elsewhere for assets to hedge against equity volatility.
“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,” said Geraldine Sundstrom, who focuses on asset allocation strategies for Pacific Investment Management Co. in London.
Pimco, which manages $1.9 trillion in assets, is far from alone. In a May note, Citigroup Inc. cited “new nontraditional investors in bullion, including insurance companies and pension funds” as part of the fuel behind the rally.
“There has definitely been more widespread institutional ownership of gold than in previous rallies,” says John Reade, chief market strategist at the World Gold Council. “Gold’s in the conversation now with much more investors than it was 10 or 20 years ago.”
Reade, who previously worked at hedge fund Paulson & Co., reckons no more than one in five institutional investors has an allocation to gold.
The allure may be that gold simply tends to do well during times of inflation or when equities stumble —two scenarios that seem within the realm of possibility in the current environment.