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
How can pension funds obtain protection from this threat? They can own gold.
Last week, Ohio's $16 billion Police & Fire Pension Fund approved a 5% allocation to the monetary metal. This relatively small gold allocation provides at least some measure of portfolio diversification and could pay off in an outsized way if the gold market enters into a price-compounding mania phase.
Ohio will join Texas, through its Texas Teacher Retirement System, in having the only known public pension programs that hold precious metals.
Each fund appears to be targeting about $1 billion in gold holdings.
Others have been urged to do so, including by the Sound Money Defense League and Money Metals Exchange, whose Sound Money Index ranks all 50 states on whether they hold gold in their pension or reserve funds.
Wyoming, for example, considered and rejected the idea early last year when gold was trading at just $1,300/oz.
In a contentious Wyoming house hearing in February 2019, the career deputy to the newly elected State Treasurer – having just turned in a staggering $300+ million loss on the state’s controversial investment in Third World debt – scoffed at gold while openly opposing his own boss who had just testified in favor of holding the monetary metal to protect the state.
Unfortunately, precious metals assets represent only about 0.5% of all savings and investments in the United States. The vast majority of pensioners and workers are thus vulnerable, like sitting ducks, to the threat of an inflation outbreak or a meltdown in the financial system.
Studies show investment portfolios that include a 5% to 10% allocation to physical gold over time enjoy higher returns, and, at the same time, less volatility. So why do so few investment managers hold even an ounce of gold?
The bias against gold runs deep, according to Larry Parks, Executive Director of the Foundation for the Advancement of Monetary Education (FAME): “Money managers, lawyers, actuaries, accountants, and other ‘fiduciaries’ recommend pension plans to not have gold in their portfolios. They say that gold is too risky and too volatile.”
But Parks says the opposite is true: “The real reason they try to discredit gold is that gold pays no fees, which is their principal concern. Thus, they have an inherent conflict of interest with pensioners, who are by law the sole plan beneficiaries. It is a scandal how pension trustees have been misled.”
A Secure Retirement Requires Physical Backup
Those who are now, or later will be, relying on a pension as their primary source of retirement income should develop a fail-safe backup plan.
The agency tasked with backing up pension programs, the Pension Benefit Guaranty Corporation, is itself underfunded and could quickly become insolvent in the event of a rise in pension failures.
Of course, the risk of a pension program failing to keep pensioners ahead of inflation is closer to a certainty.
Conventional institutional asset allocation models will be exposed as deficient and even dangerous when their stock and bond portfolios wilt under a period of possible stagflation – an economic trend that investors haven’t had to navigate since the late 1970s.
The ultimate hedge against a regime of currency depreciation and an environment of negative real returns on interest-bearing paper is physical precious metals.
As FAME’s Larry Parks advises, “If you want a secure retirement, you better own some physical gold.”
We would add that if you want the potential for some spectacular real gains in retirement above and beyond what gold delivers, you better own some physical silver as well.