Japanese Pension Fund Buys Gold as Currency

TOKYO (Aug 6)  In the midst of the current market correction in the price of gold bullion, a Japanese pension fund, Okayama Metal & Machinery, is going to place 1.5% of its total assets ($500 million) in gold bullion-backed exchange-traded funds (ETFs) (source: Financial Times, May 16, 2012).

This is the first time the fund has bought gold bullion in its history.

The chief investment officer of the fund said explicitly that investing in gold bullion was meant to protect against sovereign risk.

Historically, the $3.4-trillion Japanese pension market has invested in bonds, with the balance finding its way to other assets, but not gold bullion…until now.

The perception in Japan has begun to change, as retail investors are beginning to view investing in gold bullion as a protection against a crisis—whether it is a tsunami or a debt crisis like in the eurozone.

The oldest and largest Japanese wealth manager, Normura, has added investing in gold bullion in its survey to retail investors. It has found—much to its surprise—that the average Japanese person views gold bullion as the third-most desirable investment.

The second-largest financial firm in Japan, Mizuho Financial Group, has begun to allow smaller Japanese pension funds to invest in gold bullion.

Unlike North America, the talk isn’t of investing in gold bullion as a commodity, but the perception is that of gold bullion as a currency.

Now that the tables have turned and Japanese pension funds are beginning to dip into gold bullion, while the average person in Japan is warming to the idea of investing in gold bullion, increased demand in Japan is just beginning.

Follow me here. If even five percent of assets are invested in gold bullion, then five percent of a $3.4-trillion dollar pension fund market is a staggering $170 billion.

You know what that would do for gold bullion prices…

I don’t believe I’m making an outrageous claim. If the perception of gold bullion as protection against a crisis takes hold in Japan, then five percent is a reasonable portion of one’s portfolio to set aside for insurance against a crisis. I’m not even counting the average person in Japan. The $170 billion represents just the pension funds.

Besides China, Japan is joining the group of gold bullion investors around the world. Central banks as well have been investing in gold bullion in the first few months of this year, as I’ve been writing about in these pages.