What happens to the gold price if the 3 biggest pension funds in Japan allocate just 5% of their total assets into gold?
Earlier today we published an article from Bloomberg talking about a shift that is happening in Japan. Japanese pension funds are starting to wake up to the worry that prime minster Abe might be serious about getting the BoJ to print and print until they hit a 1-2% inflation target:
Japanese pension funds, the world’s second-largest pool of retirement assets after the U.S., will more than double their gold holdings in the next two years as the new government pushes for a higher inflation target, according to an adviser to the funds.
Assets held by Japanese pension funds in gold-backed exchange-traded products may expand to 100 billion yen ($1.1 billion) by 2015 from less than 45 billion yen at present, said Itsuo Toshima, who represented the Tokyo office of World Gold Council for 23 years through 2011.
New Prime Minister Shinzo Abe’s pledge to spur inflation to 2 percent and end the yen’s appreciation means Japanese pension funds now have to hedge against rising prices and a currency decline after two decades of stagnation. They’re set to jump into gold after 12 straight years of gains with the precious metal now 14 percent below its all-time high reached 2011. Gold priced in yen reached a record a week ago…
…Japanese pensions oversee $3.36 trillion, according to human-resource and consulting services company Towers Watson & Co. Corporate pension funds in Japan will diversify 72 trillion yen in assets after domestic stocks produced little return in the past two decades, according to Daiwa Institute of Research…
…Mitsubishi UFJ Trust and Banking Corp., which introduced Japan’s first gold ETF in 2010, expects assets held in the product to double over the next several years from 26.2 billion yen as of Nov. 30. Global investors are holding a near-record amount in gold-backed ETPs that are valued at $139.6 billion, data compiled by Bloomberg show.
Local pension funds last year for the first time allocated 2.1 billion yen, or 2 to 3 percent of their assets, in the gold- backed ETF of Mitsubishi UFJ Trust, a member of Mitsubishi UFJ Financial Group Inc. (8306), Japan’s largest lender, according to general manager Osamu Hoshi. The bank is in talks with several pension funds on gold, he said Dec. 20…
Turnover at Mitsubishi UFJ Trust’s gold ETF on the Tokyo Stock Exchange amounted to 8.67 billion yen in November, exceeding turnover in the SPDR, the biggest exchange-traded fund backed by bullion, and becoming the ninth most-traded fund out of the 140 products listed on the Japanese securities exchanges, data compiled by the bank show…
And it is this last comment that got us thinking:
…Government Pension Investment Fund of Japan, the operator of the world’s largest pension fund with 113.6 trillion yen, stays away from commodity investment as 67 percent of their assets were allocated to Japanese bonds, Sugeno said.
“Pension money invested in bullion is ‘peanuts’ at the moment,” Toshima said. “If 1 percent of their total assets shift to the metal, the gold market would explode.”
What would happen if just the top 3 pension funds in Japan allocate 1% or even 5% of their total assets into gold?
The top 3 Japanese pension funds are:
So the Government Pension Investment ($1,432,122), Local Government Officials ($189,633) and the Pension Fund Association ($124,987) have a combined $1.75tn in assets or more than half the entire $3.36tn pension fund market of Japan.
So of those three pension funds how much if any do they invest in gold?
No gold here…
…and none here either.
So what would happen if just these three Japanese pension funds started to take the lead of the smaller funds in Japan and began to allocate some of their assets into gold?
A 1% allocation of those total $1.75tn assets is around $17.5bn.
A 5% allocation would total around $87.5bn.
In a world where trillions and even quadrillions are bounded about daily $17.5bn or even $87.5bn doesn’t really sound like a lot, but in terms of gold it’s massive.
At today’s price of around $1,660 per ounce $17.5bn will get you around about 10.5 million ounces.
$87.5bn will get you around 53 million ounces.
There are 32,150.7 troy ounces in a metric tonne. Which means that in metric tonne terms we’re looking at 327 tons for a 1% allocation and 2,721 metric tonnes for a 5% allocation.
Now let’s put those numbers into perspective. First up let’s take a look at all the gold EVER mined. According to the GFMS gold survey 2012:
At the end of 2011 the total above mined stock of gold was around 171,300t, but notice that half of that amount is actually in jewelry and the amount given to investment is less than 20% or some 32,500t.
Which means that a 1% allocation move by just those top three pension funds represents, rather neatly, 1% of all the gold that is available for investments. And likewise a 5% allocation represents around 5% of the entire total world gold supply that is available for investment – in other words we’re talking huge amounts of gold.
So what would 1% and 5% allocation shift do to the price of gold? Seeing as the most likely vehicle that these pension funds will use to invest in gold is gold ETFs (until they realise that all those unallocated and uninsured bars are about as real as Japan’s chance of avoiding utter economic catastrophe – at which point they’ll pile into physical), let’s see what 327t and 2,721t will do to ETF demand. Again from the 2012 GFMS gold survey:
We can see that since January 2005 ETFs have been adding about 300t each year on average.
Currently the total holdings of Gold ETFs stands at:
84,308,944 ounces is around 2620 metric tonnes.
Since 2005 roughly speaking for every 300t of additional ETF demand the gold price has added around 20%. So all things being equal a 1% move by just the top three pension funds in Japan would take the gold price to around $2,000 and a 5% move would see a doubling of the gold price to around $3,300.
But don’t forget we’re only talking about three pension funds here with combined assets of around $1.75tn – the entire pension market of just Japan alone is worth around $3.4tn and according to Tower Watson the global pension fund market is worth:
At the end of 2011 pension assets for the 13 markets in the study were estimated at USD 27,509 bn, representing a 3.9% rise compared to the 2010 year-end value.
$27.5tn. 1% of which represents 5,152t of gold and 5% represents 25,760t – or to put that another way nearly every single piece of investable gold ever mined in the history of the world.
So if the Japanese are setting a trend for the rest of the world’s pension funds then the statement “If 1 percent of their total assets shift to the metal, the gold market would explode” is probably putting it mildly and then some.
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- Gold price back to evens for the week as Japanese pension funds look to double gold holdings – Gold at all time highs in Yen
- Pension Funds Buying Gold?
- Gold Fever in Japan
- Concern at the Comex – Texas Uni takes delivery of $1bn in physical gold are more large funds to follow?
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