Pension Funds Flock to Gold as Bond Hedge Weakens

Pension funds worldwide are increasingly turning to gold as a hedge against inflation and market volatility, according to a recent report by the World Gold Council. In the past two years, several pension funds have established or maintained positions in gold, with allocations ranging from 2% to 5% of their total assets.

One such example is the €7.7-billion Pensioenfonds PDN in the Netherlands, which began buying gold in October 2020 and completed its purchases in April 2021, reaching a 5% allocation. The fund used physical gold and futures to achieve this exposure, while reducing its government-bond holdings by 10%. This decision was based on an asset-liability study that identified diversification benefits and the potential to lower portfolio risk without reducing expected returns.

The World Gold Council notes that the correlation between bonds and equities has increased significantly in recent years, making gold a more attractive option as a hedge. The council also points out that gold tends to become negatively correlated with equities during severe stock-market selloffs, strengthening the argument for holding it as a portfolio diversifier.