(January 17, 2012) — Gold should not be used as a cure-all by institutional investors facing poor returns, consulting firm NEPC asserts in a newly released whitepaper.
“Using it will not solve all the other challenges investors face from hostile capital markets, political uncertainty, or evolving technological change,” NEPC notes, adding that gold can have a place in investors’ portfolios, but investors must do other things well in order to meet the obligations of their investment programs.
NEPC continues: “In times of elevated market volatility, investors cast their eyes to any asset category that rises as stock markets and other risky assets fall. Amid the turmoil of the last several years, only a few assets have risen consistently in price – prominently US Treasuries and gold. In fact, one cannot go very far without encountering the topic of gold.”
The firm concludes that gold has three potential roles in institutional investment programs:
1) As a component of a broader real assets investment allocation to help hedge against in-flation,
2) As a source of alpha for trading-oriented strategies such as global asset allocation and global macro,
3) As a component of a “tail-risk” hedge against extreme economic environments.
NEPC notes that it believes gold can be utilized as a hedge against inflation and/or the devaluation of fiat currencies, and as a source of alpha from dynamic trading by active investment managers. NEPC adds that gold may be a component in a commodities portfolio, a position in a dynamic global asset allocation program, a part of a global macro strategy, or, in the extreme, a dedicated long-term holding — as was showcased by the gold purchase by the University of Texas Investment Management Company (UTIMCO) last year. “Thus, any exposure to commodities should have a gold component,” NEPC says.
Commenting on the other side of the debate, NEPC notes that the other main argument against holding gold, especially in the later part of 2011, is tactical. “Gold has experienced a remarkable increase in price that has accelerated as the overall global financial situation has worsened. After such a run it is possible that we are at the top of a bubble which is about to burst. The vertiginous fall in gold’s price in September 2011 highlighted the possibility of further price declines and emphasized the high price volatility that gold can experience. Since there have been major price movements of gold in the past, some argue that its volatility is too high to justify having in any portfolio.”
Nevertheless, NEPC concludes that managers can add alpha on the long and short side from trading the price movements in gold as they can in other currencies, sovereign bonds, equity indices, and commodities.
The pros and cons of investing in gold as outlined in NEPC’s research paper follows news from Qatar Holdings — a unit of the Qatar Investment Authority that controls the wealth of the Middle East state’s royal family — regarding its investment of about $1 billion in European Goldfields.
Ahmad Mohamed Al-Sayed, Managing Director and Chief Executive Officer of Qatar Holding said in a statement: “This transaction…helps to further diversify our investment portfolio in the commodities sector, with a specific position in gold resources and another long-term partner secured for the future. We see the transaction as one that will create a lot of value for all shareholders, and represents our positive view on Greece in general.”
Qatar Holding had purchased 10% of European Goldfields from existing shareholders, entering into a call option agreement that allows it to buy another 9.3-million shares, which could take its total ownership up to nearly 15%.
Related article: “Paulson’s Big Short“