Pension Funds Start Looking to Gold to Avert Disaster by: Stefan Gleason
Money Metals News Service
September 1st, 2020
Public and private pension plans face a dual crisis.
The first and most obvious threat to pensioners is that defined- benefit vehicles are severely underfunded. By one estimate, pension systems taken as a whole are $638 billion in the red.
Some are in better shape financially than others. But all pension plans will have to reckon with a second huge challenge going forward.
Namely, they are already entirely unable to meet their stated return objectives by owning conventional “safe” interest-bearing instruments such as Treasury bonds.
Fed Declares War on Savers
The Federal Reserve has effectively declared war on savers by vowing to hold short-term interest rates near zero, likely for years to come. Longer-term bond yields also plummeted to record lows (below 1% for most maturities) this year.
An ultra-low interest rate environment is survivable for investors only so long as rates keep falling, thereby generating capital gains on bond holdings that supplement their diminutive coupon payments.
But what happens when the great bond bull market, which has been intact for nearly four decades, reverses? It will be a disaster for the assets of pension funds.
They could reach for yield elsewhere by owning dividend-paying stocks. But an all-equity portfolio would be too volatile for their conservative investing mandate. Even the highest quality stocks got hammered during the virus-induced economic lockdown hysteria this spring.
Market volatility combined with rising liabilities has driven a 6% increase in total adjusted pension debt this year, according to Moody’s Investor Services.
Meanwhile, the Federal Reserve recently announced that it would be changing its 2% inflation “target” to an “average.” That gives central bankers the policy leeway to begin pushing inflation well above 2% for an extended period. (And let’s not forget the Fed also uses the U.S. Government’s grossly understated inflation statistics.)
Pension Plans CAN Hold Gold – But Only These Two Do
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