(Winter Olympics are going on right now. USA!)
I sit on a defined benefit committee for my company. The goal of the committee is to act as a fiduciary in safeguarding assets for those that invest into the plan. One of the criteria that long existed before I arrived on the committee is that the plan can only invest in assets that are readily able to be marked-to-market. In other words, investments must be in public/traditional assets. Since about middle of 2021, I’ve been gradually and steadily recommending moving a relatively large allocation into gold. With each subsequent meeting as my push gets stronger, we are finally going to do a special committee meeting tomorrow to vote on it. I’m writing this to review my stance on gold prior to the meeting.
I have never been a “gold bug”. Historically, I’ve ascribed to the Warren Buffet philosophy that gold has no intrinsic value. For Buffet, intrinsic value is an asset that produces something — businesses produce goods and services, stocks produce dividends, bonds produce yields. Gold is a hunk of yellow metal that just sits there.
However, I’m seeing more and more tailwinds for gold. Although the common belief is that gold is a hedge for inflation, this is not quite accurate. Gold thrives in 2 scenarios — negative real interest rate and falling fiat currency. Furthermore, historically, gold has outperformed when Fed tightens monetary policy. The fundamentals are there for gold to outperform.
Even with the excessive money printing by central banks and resultant sky high asset prices, gold has generally been unloved. After reaching a high summer of 2020, it has trended down and traded sideways since. This is actually attractive as it suggests that in addition to the fundamentals, gold is not overbought.
Additionally the plan essentially consists of stocks and bonds. Given monetary policies, both are very high in valuation (although recent Fed movements has brought bonds down somewhat). Traditionally, stocks and bonds are negatively correlated with one another (when one goes up, the other goes down). This is beneficial from a Modern Portfolio Theory perspective, whereby you can get the same return for less volatility. Recently however, stocks and bonds are very correlated given monetary policies. Currently as Fed is starting to unwind these policies, stocks and bonds are expected to move in tandem. However gold has continued to be an uncorrelated asset to both. By introducing gold into the portfolio, this will reduce the expected volatility that may occur, which is beneficial for the plan.
Keep in mind, a defined benefit plan ought to be managed differently than an individual’s portfolio. A 30 year old may have all his money in equities willing to ride out volatility. Meanwhile, a plan is expected to have lumpy withdrawals and hence decreasing volatility is highly beneficial.
The Fed is in a tough spot. Inflation is at 40 years high and they need to act on their mandate of stabilizing the currency. However I believe all the economic boom since the covid shut down is largely due to stimulus and not innate. As Fed starts to unwind monetary policy, no doubt we will see economic growth stall and may even enter a recession. If inflation is still uncontrolled at that point, then what? What will the Fed do? And whatever they do, will it finally sow the doubt for the dollar as a stable currency? We have a very volatile 1–2 years for the markets. I believe in this environment, gold will outperform.
Update: Resolution passed
