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Never mind inflation or credit default. There
are plenty of less scary reasons to consider gold investing too...
GOLD IS OF COURSE
for kooks
and weirdos only – those doom-mongers who,
bothering to read history, think printing money risks massive inflation, and
who also fear banking and even government default today. Can you imagine!
Still, as we've
learnt since gold's record peaks of summer 2011, it
does much more than go up in a straight line. And that's why gold investing
might also for other people too – better-paid, less wild-eyed people in
sharper suits. Or at least it would be. If only professional money managers
studied the data, like the doom-mongers read history.
"Asset allocators at major retail [investment] firms have their equity
weighting the lowest in over 15 years," reckons
David Lutz at Stifel Nicolaus, which itself
runs some $126 billion in assets – "well below 2009 levels."
It's the same story in Europe, and in the City of London it's
samer still. "UK pension funds have less
invested in equities than at any time since the 1974 stock market
crash," reports the Financial Times, citing Swiss bank UBS's Pension Fund Indicators 2012
report and pointing to the average fund's 43% investment in listed shares,
down fully 7 percentage points last year from 2010.
So where are pension-fund and wealth managers putting your money instead? Not
into gold investing, that's for sure. Overall, institutional positions in
gold remain at perhaps 0.3% in
the rich West. Yet two-fifths
of international wealth managers are out-of-step with their model
allocations, according to Scorpio
Partnership's
latest private-client portfolio survey, moving the mismatch into cash above
all else. And institutional investors now hold an average 27.4% of their
money in US Treasury bonds, according to Stone & McCarthy Research
Associates this week.
This dash to cash (and near-cash)
makes sense, perhaps, amid the ever-swelling Eurozone crisis. But given the likely response of central banks (money printing) and governments
(deficit spending), surely the end-client's inevitable loss of real spending power demands a second
look, never mind the end-client's loss of potential gains in higher-risk assets. Put another way, this reckless
caution has "two potentially
detrimental repercussions,"
notes a new report from the World Gold Council, market-development
organization for the gold industry
– "the stagnation of capital due to lack
of income and even negative yields [plus] the concern that monetary stimulus eventually
leads to unavoidable and problematic
inflation."
No, we're not back to gold bugs warning about
quantitative easing and inflation. Not yet. Rather, the World Gold Council's analysis points to gold's value in a diversified
portfolio. Because nothing
adds quite the
diversification that gold does,
as this new research
shows.
First though, why might diversification matter?
The finance industry employs
it not only to charge
more fees for tweaking
allocations here, or bill you
for cycling into fresh asset classes there. No, it's because unless you can see
the future, you cannot
know which investments
are going to perform next year or beyond, as the famous Callan Periodic
Table shows plainly. This year's
winners may well win again; Emerging
Market Equities did for 5 years straight in the
middle of last decade. But then
that winner could just easily sink
to last place, dropping 53% of its
value, as Emerging Market
Equities did for Dollar investors in 2008.
So how has gold investing performed against the 9 key
indices tracked in the Callan
table? Adding gold takes
the tally to ten, of course.
And gold's average
position over the last decade has been 3.8, second only to those Emerging Market Equities, but coming second and
first in 2008 and 2011 respectively
– when EM stocks sank
to last place.
But back to the World Gold Council's new research – Gold as a Strategic
Asset for UK Investors
– and speaking directly
to asset managers running UK money, "Gold is a highly effective vehicle for diversification and risk
management," says their
latest analysis, "because of its independence from other asset classes."
That independence comes thanks to gold's role as a savings vehicle worldwide, a consumer luxury in the West, must-have household
asset in Asia, and continued industrial input
– especially in electronics
today. That last element accounts for only 15% of annual demand by weight, however. So gold investing prices aren't exposed to the economic cycle in anything like the way that base metals, energy or other commodities are. "The unique dynamics
and geographic mix of supply
and demand for gold," as the World Gold Council's report
notes, "mean that its price performance typically behaves quite differently from most other
assets." And never
more usefully than when stock markets sink.
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