Japanese Pension Funds With $3.4 Trillion In Assets Seek Safety In Gold

December 18, 2012

The world’s largest, most sophisticated investors are turning to gold…

These fundamentals are leading to broad based global demand for gold – from retail investors to institutions and pension funds. Japanese pension funds are increasingly looking at gold according to an article in the Wall Street Journal this morning.

Diversification into gold is taking place in order to protect against sovereign risk, debasement of currency risk and inflation risk.

In March 2012, Okayama Metal & Machinery became the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Okayama manages pension funds for about 260 small and mid-sized companies in the Okayama area.

“By diversifying currencies, we aim to reduce risks associated with them,” said Yoshi Kiguchi, the fund’s chief investment officer. “Yields become stable if you put small amounts into as many types of holdings as possible.”

Of its 40 billion yen ($477 million) in assets, the fund has invested around ¥500 million-¥600 million in gold, he said.

Initially, the fund aims to keep about 1.5% of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”.

Other pension funds in Japan are following their lead according to the Wall Street Journal.

Japanese pension funds are diversifying into gold “largely to mitigate the damage from possible market shocks”.

Japanese pension funds invest mainly in domestic stocks and bonds. Until recently, none have looked to gold or other physical assets.

Gold, whose price movement isn’t historically correlated with those of stocks or bonds, can protect portfolios from being damaged too badly in times of market stress, investment managers say. Low interest rates also justify holding non-yielding gold in place of cash.

Mitsubishi UFJ Trust and Banking Corporation said it has secured more than Y2 billion in investments from two pension funds for a gold fund it started in March.

Gold is also used as a hedge against inflation, which is becoming a bigger concern as global central banks buy ever-more bonds, market watchers say.

Even a small allocation by pension funds internationally to gold would result in a significant new source of demand which could be a new fundamental factor which propels prices higher in the coming years.

CNBC – Yoshikami: Four Things You Need to Know About Gold Now

May 25, 2012
Published: Friday, 25 May 2012 | 10:26 AM ET
Michael Yoshikami
CEO, Founder & Chairman, Destination Wealth Management

Gold is negative for the year and has caused some to say it is time to abandon this metal as an investment. After all, isn’t gold supposed to rise consistently every year and always rise when equity markets drop?

Since the price of gold [GCCV1  1571.90    14.40 (+0.92%)   ] has not ratcheted up in this latest Europe driven downturn, some say surely that must mean that the wisdom of owning gold is now null and void.

I disagree; gold should still be a part of your investment plan.

Here are a few thoughts to keep in mind as you consider investing in gold for your portfolio strategy.

1. Recognize that investing in gold is not a guaranteed positive return investment every year; gold can and will lag other asset groups depending on the current environment. This is particularly the case when liquidity becomes a concern in global markets and gold is sold to raise cash. Remember, this asset will rise and fall in value like any other asset; a longer-term time horizon is required when buying this precious metal.

2. Central banks will continue to diversify out of US dollars and European currency. Having just returned fromAsiathis week, it never ceases to amaze me the level of skepticism that businesses and governments have regarding the fiscal prudence of US and European leaders. The bottom line is they simply don’t believe that responsible decision-making will occur leading to currency stability. For that reason, central bankers around the world will continue to buy gold as a substitute for unstable currencies.

3.India andChina will continue to consume record amounts of gold as affluence rises. One only needs to spend time in Macau orBombay orShanghai to see that the demand for gold has never been higher as emerging countries continue to increase wealth. inIndia andChina, gold is symbolic of good luck, affluence, and status. Despite the bumps thatIndia andChina might encounter in their economies, gold consumption will continue to accelerate.

4. One day inflation will emerge. And when inflation does rise, tangible assets will provide some level of inflation protection. Given the incredible stimulus policies around the world, it’s hard to imagine that pent-up inflation is not bubbling below the surface in global economies.

Assets such as commodities and other tangible goods tend to do well in inflationary environments. Gold is no exception to this trend.

While it is tempting to be shortsighted when investing in any asset, it is critical that one analyze the role of each position in a portfolio strategy. This analysis is required to assure that a plan for investment factors in not only what might go right with an investment plan, but also what might go wrong as well.

When inserting gold into your strategy, make sure it is part of an overall plan. Do not get caught up in short-term price movements when building a long-term investment allocation. There have been many times in the past when gold has underperformed other capital assets only to see valuations roar back. Don’t get left behind when gold makes its latest recovery.

And be prepared to increase your position when inflation begins to emerge. Be tactical but long-term in perspective and make gold part of your offensive and defensive investment strategy.