Investing in gold would be a good way to rebalance the portfolio of pension funds and other institutional investors before the European sovereign debt crisis turns for the worse, a bullion expert advises.
"Sovereign debt and bank leverage in developed countries is out of control. As they turn their gaze from European turmoil back to exploding U.S. and Japanese debt, prudent investment managers should rebalance their portfolios appropriately before bigger storms hit," said Bullion Management Group Chief Executive Officer Nick Barisheff.
Barisheff pointed out that Canada, where his company is headquartered, was not immune from financial difficulties. He cited a report by RBC Dexia that Canadian pensions lost 3.2 per cent of their value in 2011.
Canadian pensions that shed values include the Ontario Teachers Pension Plan which reported a C$17.2 billion shortage in 2010, the Ontario Municipal Employees fund, which was short by C$4.5 billion, and Dalhousie University, whose pension shortfall doubled in the past 18 months and is now considered critically underfunded.
Barisheff said that by using gold as a portfolio, a pension fund's foundation increases risk-adjusted earnings, diminishes losses and preserves capital. Had U.S. dollar-based investors allocated 3.7 per cent of their portfolio to gold, they would have reduced their losses by US$177,000 on a US$10 million portfolio during the 2007-2009 financial crisis, he estimated.
Using the same scenario, euro-based investors would have saved €314,000 on a €10 million portfolio if they allocated 5.5 per cent of their holdings to gold, he reckoned. For pound-sterling holders, the savings would have been ₤292,000 based on a 4 per cent gold position.
However, the biggest argument in favor of gold holdings, according to the World Gold Council, is that from 2007 to 2009, gold prices went up 40 per cent while financial stocks dipped 60 per cent. The S&P 500 fell 40 per cent even if it logged an 11-year rise against all major currencies and equity classes.
Barisheff said that besides outperforming traditional safe haven assets, other independent trends have an impact on the price of gold. These include higher central bank buying, movement away from the U.S. greenback and factors such as ageing population, job outsourcing and peak oil. These factors made Western governments devalue their currencies and added to their debts which would likely create more financial scares in the months and years to come.
"If these trends continue, $10,000 gold will happen sooner than you think, and pension funds and institutional investors can only benefit from adding bullion to their portfolios," Barisheff said.
Gold for December delivery closed up $3.80 on Tuesday at $1,782.20 an ounce at the New York Mercantile Exchange's Comex division. The modest gain was because of investors deciding whether to buy the precious metal as a safe haven or exchange it for cash.
"Gold is still a safe haven, but it is a tradable asset and people buy gold for different reasons," Casey Research Senior Precious Metals analyst Jeff Clark told The Street.
He explained that among the reasons people buy gold is as a hedge against inflation, deflation, debt worries, panic and economic calamity. On any given day, any of these factors become more prevalent, Clark added.