Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Gold, Silver and Pension Funds Portfolio Diversification Myths

Commodities / Gold and Silver 2011 Jul 19, 2011 - 04:32 PM GMT

By: Nick_Barisheff

Commodities

Diamond Rated - Best Financial Markets Analysis ArticlePension funds across North America are facing record shortfalls. Research shows that 33% of Canadian pension funds are struggling to meet liabilities(Figure 1); the Ontario Teachers' Pension Plan funding shortfall, for example, ballooned to $17.1 billion in 2009, despite strong investment returns.


Ratio of Assets to Liabilities

In the US, public pensions expect a shortfall of $2.5 billion that will force state and local governments to sell assets and make deep cuts to services. When anticipated future payments are taken into account, the amount reaches a staggering $1.9 trillion.

The solution for pension funds is simple: restructure asset allocation and include precious metals bullion.

Fiduciary Responsibility and Rethinking Asset Allocation

Pension fund managers have a fiduciary responsibility to meet liabilities; they use asset allocation to achieve diversification in order to reduce risk, maximize performance and thus responsibly manage their funds. To ignore the best-performing asset class year after year could conceivably expose managers and trustees to legal liabilities (Figure 2).

Precious Metals versus Indices

The traditional view is that three asset classes (stocks, bonds and cash) are sufficient to achieve diversification. But Figure 3 shows that only precious metals offer negative correlation to stocks, bonds and cash; a portfolio that consists of only positively correlated asset classes is not balanced or diversified.

Most Negatively Correlated Asset Class

Holding cash for portfolio protection does not work either. Figure 4 shows the dismal performance of five major currencies versus gold since 2001.

Currency Decline

How to Invest in Bullion

For wealth preservation and portfolio protection, gold bullion should form the foundation of an investment portfolio.

Figure 5 shows various investment vehicles based on inherent risk. During periods of economic uncertainty, wealth preservation is critical and unnecessary risk should be avoided. The best investment strategy for long-term investors seeking low risk with secular growth potential is unencumbered physical bullion, as illustrated in the Precious Metals Investment Pyramid.

Precious Metals Investment Pyramid

Gold is Low Risk

A prevailing myth says gold is risky and volatile. In fact, the opposite is true. Standard deviation, a commonly used measure of risk, calculates the total risk or variance associated with the expected return. Using this method to compare gold to every Dow Jones component over the last decade shows that gold is less volatile and has better performance. Other methods, the Sharpe Ratio and the Sortino Ratio, deliver similar results.

The Dow:Gold Ratio

The Dow:Gold Ratio measures trend changes in the gold price versus a basket of stocks as represented by the Dow (Figure 6).

Dow/Gold Ratio

When the Ratio is rising, as in the 1920s, the 1960s and the 1990s, you should be overweight stocks. When the Ratio is falling, as it did in the 1970s and is doing today, it is time to be overweight gold and precious metals in portfolios. Currently the ratio is less than 9:1 and falling, meaning investors should rebalance into gold and precious metals, which will allow for reduced risk and maximized returns.

An Appropriate Allocation

Although global pension assets are estimated to be $31.1 trillion, at present, pension funds allocate virtually no funds to gold. (Figure 7)

Percentage of Gold Holdings in a Typical Pension Fund

According to an Ibbotson Associates study, conservative portfolios require a 7% allocation to gold, and aggressive portfolios require a 16% - 17% allocation, simply to achieve a balanced, diversified portfolio. This is known as strategic allocation.

From a tactical allocation standpoint, Wainwright Economics sees gold as a leading indicator of future inflation. In a high-inflation environment, which the ongoing global money printing practically guarantees, they recommend gold allocations of 17% in a bond portfolio and 40% in an equity portfolio, just to break even against inflation.

While pension funds are far below these recommended levels, the mindset is beginning to change. Last year, the University of Texas invested $500 million in gold due to fears of "unstable international financial markets and the possibility of high inflation." This trend will accelerate as the global economic reality we live in becomes more widely understood.

Globally, financial assets are estimated at over $200 trillion, while total aboveground gold bullion is a modest $3 trillion (Figure 8). About half of that is owned by central banks, and half is privately held and not for sale at any price. When pension funds begin to move into gold, the price could skyrocket.

Gold versus Financial Assets

Savvy investors and pension fund managers alike can protect their portfolios and ensure that future liabilities are met by allocating to precious metals bullion now, while there is still enough supply available to meet pension fund needs, and the price is reasonable.

By Nick Barisheff

www.bmginc.ca

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends. He is interviewed monthly on Financial Sense Newshour, an investment radio program in USA. For more information on Bullion Management Group Inc. or BMG BullionFund, visit: www.bmginc.ca .

© 2011 Copyright Nick Barisheff - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules