As inflation is back on institutional investors’ minds, some are eyeing an allocation to gold, both directly and through companies with exposure to the metal, according to one investment manager.
“We’re actively having a lot of conversations right now with institutions,” says John Ciampaglia, chief executive officer of Sprott Inc.
“What we’re finding is a lot more reception about precious metals and investing in them, not just in the physical but in a variety of ways. And it’s not a one-size-fits-all type of solution or conversation that we’re having.”
Since 1970, the price of gold has consistently grown at a rate that comfortably beats the rate of inflation, proving an effective hedge during periods of high price growth, according to a recent blog post by State Street Global Advisors’ exchange-traded fund specialist, Robin Tsui, and its head of gold strategy, George Milling-Stanley.
When the rate of inflation rose to more than five per cent a year, the price of gold had an average annual growth rate of 15.2 per cent, they noted.
“The word inflation is being introduced back into our narrative, so for any large plan that has inflation index payment liabilities, they are starting to think differently about their allocation to inflation sensitive assets,” says Ciampaglia.
Further, he’s finding in his discussions with institutional clients that they like gold’s low correlation with the bulk of assets typically held by pension plans, such as equities and bonds. In their blog post, Tsui and Milling-Stanley also emphasized that feature, noting gold’s low and even sometimes negative correlation with global bond and equity markets.
“They are looking for simple, low-cost and effective diversifiers in terms of correlation to traditional assets,” says Ciampaglia.
As for gold stocks, there’s a possible tactical play at the moment, he says. “Some plans are looking at the valuations of the gold mining companies themselves. And there has been a dislocation in the market where the price of gold has gone up nicely over the last couple of years, but the gold stocks last year, for example, barely moved or were negative on the year. And gold was up around 10 or 12 per cent, depending on the currency you’re using. So the plans are starting to look at the gold space again on the public equities side.”
Another tangential exposure to the material is private credit deals between pension plans and companies in the mining sector, he adds. “They’re looking at that to gain exposure to the sector, also some upside to the sector if the price of gold goes up, but doing it in a more secure segment of the capital structure of a company.”
Such forays represent a move back into a sector institutional investors have been cold on for some time, says Ciampaglia. “It’s still information gathering. Some plans are making moves right now. Other plans are in research and building up the investment case to present to their committees.”
This article originally appeared in our companion publication, BenefitsCanada.com