Whales Enter The Gold Market

Last April, gold-investment analysts where excited to see a new institutional player enter the gold market. The University of Texas Investment Management Co. took delivery of nearly $1billion of gold bullion to a New York vault. The reason gold watchers were interested was because large institutional players had been largely absent from the market and their huge purchasing power had therefore not had its potentially significant positive effect on the price of gold.

The purchase by America’s second largest academic endowment was noted in case it was the start of a trend. Nonetheless, continued institutional bids into the gold market did not follow in great enough numbers to identify a compelling trend. Apart from last summer’s run to over $1,900/ounce, gold has not seen a notable increas in institutional buying.

However, the Financial Times, last week, reported some interesting news for those monitoring such trends.

Pension Funds And Gold Bullion
Traditionally, pension funds have ignored gold due to their focus on yields. Japan is the world’s second largest pension market, and this move by Okayama Metal & Machinery is worth noting. Such a move into non-yielding assets becomes more palatable in a world of negative real interest rates where institutional investors are paying for the ‘privilege’ of holding government paper.

The fund’s aforementioned CIO appears to have talked his investment committee into a long term, wider view of asset allocation. Mr Kiguchi had made the case that a lack of yield needed to be balanced against currency and default risk. Loose monetary policies and the durability of fiat currencies seemed to be on his mind when he commented, “from a very long-term point of view, gold may be one of the safe currencies”.

This point about long-term asset allocation is one that has been made by Ben Davies of Hinde Capital. Mr. Davies and Hinde Capital have also been observers of Japan’s potential in the gold market and, according to the FT, this potential may be morphing from latent into patent demand.

Succinctly explaining recent performance across asset classes, futures broker Yoshio Kuno, Japan head of Newedge, argued, “If you look at assets over the past couple of decades, equity has been a loser, while fixed income offers tiny coupons. Gold is becoming an acceptable currency substitute.”

This sentiment out of Japan suggests further evidence of declining trust in fiat currencies. But is a wider trend of growing institutional demand for gold appearing?

Whales And The Gold Market
Recent SEC filings show other institutions participating in the gold market. Most of these names are familiar to gold-market observers, with some increasing their participation while others are new buyers.

Eton Park Capital, Paulson and Co., PIMCO, Soros Fund Management and the Teacher Retirement System of Texas all bought shares of the world’s largest gold exchange traded fund (ETF), known by its ticker of GLD, in the first quarter of 2012.

Soros quadrupled his position in gold compared to the previous quarter, as PIMCO and the Teacher Retirement System of Texas were also net buyers. Meanwhile, Eric Mindich’s Eton Park Capital was a new buyer with a purchase of 739,117 shares, having held no position in GLD at the end of 2011.

Large Buyers Need Liquid Gold Products
It's also worth noting the size of some of this participation. Investment by Okayama Metal & Machinery of $500m and Eton Park Capital of $110m is larger enough for these buyers to need a highly liquid gold-investment solution.

Institutions that need to invest in regulated securities tend to look toward the largest ETFs, like GLD, as only these products are liquid enough to handle their buying and selling without inordinately affecting the price. This can be especially relevant for some pension funds that may be unable to take delivery of physical bullion as did the University of Texas Investment Management Co. and David Einhorn’s hedge fund, Greenlight Capital.

Eric Sprott’s Physical Gold Trust and the Central Fund of Canada might be a structurally superior means of achieving gold, or precious-metals ownership, but at the time of writing, Sprott Trust’s Net Asset Value (NAV) was less than $2.2bn and the Central Fund’s NAV was less than $4.8bn. This compares to GLD’s current NAV of $63.5bn. Whale sized gold buyers need deeper liquidity and, regardless of opinion as to its suitability for gold investment, GLD has it.

While institutional action in the gold market might not point to a firm trend of hot institutional activity, it's worth a look. Trends have to start somewhere, and while gold is not significantly held by institutions generally, the motivating concerns mentioned by Okayama Metal & Machinery’s CIO might be held more widely across the industry.

The move into gold by Okayama Metal & Machinery should be looked at in the same light as the University of Texas Investment Management Co.’s gold investment last year. For now we see a slow drip as financial glaciers melt and capital begins to look for more secure homes and better collateral.