Pensions May Be Unwise Allocating to Gold

(March 14, 2011) — Gold, often viewed as a safe-haven during periods of crisis, is being increasingly scrutinized as an investment for pension funds.  

Many investors view gold as a good way to invest in expectations of higher inflation, via a modest allocation, but Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told aiCIO that funds are not wise to invest in the volatile asset class. “A basket of commodities would be a much better hedge against inflation compared to purely investing in gold, which doesn’t give much of a return,” he said.

Last month, a Netherlands-based $404 million (€300 million) pension fund for workers at several Dutch glassmaking plants owned by O-I International was ordered to rid itself of its gold holdings. The De Nederlandsche Bank (DNB), the Dutch pensions regulator, ruled the scheme’s exposure to the precious metal was too risky. The Stichting Pensioenfonds Vereenigde Glasfabrieken pension fund had wanted to maintain its gold allocation. Yet a Rotterdam court sided with the Dutch central bank — forcing the fund to sell its gold holdings, generally viewed as a safe harbor investment, to a percentage of 3% at most, compared with the current holding: 13% of assets. The regulator asserted that the average fund has just 2.7% in commodities, including gold.

While the value of commodities plummeted during the financial downturn, the sector enjoyed a 50% to 60% return over the past year and a half. “Funds would be wise to take advantage of that,” Baker said. Research last year by Barclays Capital supports Baker’s remarks. The firm showed that net inflows to commodity-related investment are expected to remain strong in 2011, driven largely by institutional investor demand. The report showed that commodity investments stood at $376 billion as of December 31, 2010, up from $270 billion the previous year. Institutional investors accounted for a large percentage of the total, with a record $8 billion of inflows in December. Barclays’ estimated that for the year, net institutional inflows accounted for almost 75% of the total inflows at $46 billion.