State investors stock up on record gold reserves amid uncertainty
The gold reserves of the world’s biggest public sector investors reached an 18-year high as they hoarded the precious metal after Donald Trump’s election and the Brexit vote added to geopolitical uncertainty.
State investors increased their net gold holdings by 377 tonnes to an estimated 31,000 tonnes last year — the highest level since 1999, according to a study of 750 central banks, public pension plans and sovereign wealth funds with $33.5tn in assets.
Danae Kyriakopoulou, chief economist at the Official Monetary and Financial Forum (Omfif), the central bankers’ forum that compiled the research, said state investors had flocked to the precious metal because of its status as a “haven asset” and to take advantage of rising prices.
“There was a lot of political uncertainty in the past year. There were big political shocks with Brexit and Trump, which have driven investors back to gold,” she said.
The price of gold surged after the unexpected Brexit vote in June and immediately after the election of Mr Trump in November, although it fell in the final weeks of the year.
Alistair Hewitt, head of market intelligence at the World Gold Council, said state-backed investors had also increased their gold stores as a hedge against a potential weaker dollar.* The dollar is up 15 per cent against the pound over the past year.
“Central banks and public institutions have been adding to their strategic gold holdings for a number of years,” Mr Hewitt said. “A lot of emerging market central banks hold significant amounts of US dollars, and they have bought gold as a hedge against this concentrated currency exposure.”
The central banks in Russia, China and Kazakhstan are among the big investors that bought gold last year, according of Omfif.
Public sector investors are also likely storing up gold as a bet against rising inflation, said Saker Nusseibeh, chief executive of Hermes Investment Management, the £30bn fund house. “Gold is the refuge of uncertainty.”
Although the outlook for global growth has stabilised in 2017, public investors remained concerned about the fraught political environment globally, the Omfif study found.
Mr Trump is embroiled in a battle with James Comey, the former FBI chief who has accused the president of lying. This has raised questions over whether the former reality TV star can maintain his hold on the Oval Office.
The political climate is also fraught in the UK, where a snap election failed to deliver the majority of seats the ruling Conservative party wanted ahead of the country’s upcoming Brexit negotiations with the EU.
According to Omfif’s study, geopolitical risk was the biggest concern for pension plans, sovereign wealth funds and central banks over the next 12 months.
Over the next 24 months, state-backed investors are increasingly on the hunt for so-called real assets, such as property and renewable energy, in an attempt to generate returns, the research found.
The total assets managed by public sector investors globally increased 1.3 per cent in 2016, driven by strong investment returns in pension funds. European state investors experienced even faster growth, with assets rising 3.2 per cent.
The People’s Bank of China remained the world’s largest public investors with $3tn in assets, ahead of Japan’s Government Pension Investment Fund. Norway’s oil fund ranked as the world’s largest sovereign wealth fund.
* The article has been amended to make clear state investors increased gold stores as a hedge against a potentially weaker dollar