Letter from US: Gold investment returns to favour

Indeed none other than Wall Street investment guru Warren Buffett, after saying for years that gold “doesn’t do anything but sit there and look at you”, has recently disclosed a $565m (€482m) stake in the Barrick Gold Corporation. That makes his holding company, Berkshire Hathaway, the 11th-largest shareholder in the gold miner. 

At the same time, some institutional investors, including US pension funds, have started viewing gold as a strategic allocation. A recent example is the $15.65bn Ohio Police & Fire Pension Fund (OP&F). In August its board decided to approve one change to its portfolio that was advised by its investment consultant, Wilshire Associates, within a general asset allocation review. It added a 5% allocation to gold. 

“OP&F and Wilshire believe that the addition of gold will give the portfolio a strong diversifier to its growth-oriented investments as well as provide an effective hedge against inflation,” say the notes from the investment committee meeting. OP&F investment staff and Wilshire are now exploring how to best implement the strategy. No new manager will be hired and there is currently no timeline for implementation.

The first public US pension fund to make an investment in gold separate from commodities was the Teacher Retirement System of Texas (TRS). In 2009 it launched its gold fund. In an interview with the World Gold Council in 2016, Shayne McGuire, portfolio manager of the TRS emerging markets and gold fund, explained: “Gold, which has different demand and supply drivers than financial assets, is generally negatively correlated with stocks. Since the end of Bretton Woods, every time the S&P 500 has fallen more than 10% in a year, gold has been up. Despite the collapse of commodities during the 2008 financial crisis and the metal’s initial decline, gold was one of the few assets that ended positive for the year. We thought that adding gold as a relatively small percentage of total assets would improve the Trust’s long-term risk-adjusted returns due to diversification benefits.” 

A spokesperson for TRS confirmed that McGuire’s statement remains accurate today. TRS does not break out of its precious metal positions: they are included in its $270m commodities portfolio. This accounted for 0.2% of the total $155bn assets under management at the end of June 2020. The largest holding, at 54.2%, was in global equities.

Another Texan fund, the $52bn University of Texas Investment Management Company (UTIMCO), was an early advocate of gold as a hedge against global currency debasement threats. Until 2018 it had a $1bn gold position. But then the new chief executive officer Britt Harris decided that those systemic risks were not as prevalent anymore. Instead it adopted a new strategic asset allocation with a target for gold down to zero.

“We, as a consulting firm, recognise that for institutional investors it is a difficult decision risk to use gold as a strategic allocation,” says McKee. “Personally, over a decade I have been a believer in gold as another diversifying asset. Especially after 2011 gold has been a terrible investment, with stocks of gold miners the worst ones. But since 2018, with the Federal Reserve pushing short-term rates below the inflation rate, the future of gold has been looking very good.”

The Callan consultant points to returns to make his point. For the 10 years ending in 2019, real annualised real returns on Treasury bills were a negative 1.2%. In contrast, the real returns on gold were 2.5% annually. 

“Of course gold’s value will always have ups and downs, so it is a very long-term commitment,” McKee says. 

Callan’s consultants have discussed the topic with some US pension funds. None of its clients have invested in gold yet because of lack of support by board members or staff.

However, according to McKee, the COVID-19 crisis has increased investors’ concerns about unconstrained monetary and fiscal policies that may cause inflationary pressures. “If the global long-term outlook for cash becomes more negative-yielding, gold’s immutable physical stock becomes more valuable; it is both an inflation hedge and a crisis hedge,” he says. “Institutional investors with significant cash reserves or fixed-income exposures at risk of inflationary pressures or currency shocks can rationalise a strategic gold allocation for their real asset properties.”

In relation to Warren Buffett’s investment in gold, the Callan consultant says: “It is interesting to have him at our side. It is probably because his Berkshire Hathaway has a lot of cash that is earning negative yields.”

Rather than buying physical gold or exchange-traded funds or even betting with futures and options, maybe the simplest and most effective way to invest in gold is to buy gold-mining stocks. That is what Buffett did, according to McKee: “The gold-mining industry is learning lessons from the past and it is becoming more disciplined.”