Gold: Insurance for the Insurers

For many investors the thought of investing in gold is a foreign one. This is not exclusive to individuals either. For years institutions neglected to include gold in asset allocations and refrained from publishing research on individual mining companies. It was not until gold began its ascension to its nominal highs last year that talk of the sector began to heat up. Now it seems those institutions with the most at risk are starting to take notice, finally.

While the announcement that Northwestern Mutual Life Insurance Company has, for the first time in 152 years, begun investing in gold may not have sent shockwaves through Wall Street, it is a very significant vote of confidence in the metal. After all, it is the insurance industry that is supposedly held to the highest standard in asset management. American Int'l Group (NYSE: AIG) notwithstanding, the insurance industry's risk management is stricter than even that of our banks.  In this light, the mere fact that a large insurer is considering owning gold, let alone already having accumulated $400 million, is nothing to scoff at. In short, Northwestern Mutual believes gold is safer than U.S. Treasuries as a store of value and they have enough conviction in that belief that they are willing to bet that gold will protect them against the uncertainty of claims that may come due. 

It is therefore getting more and more difficult to argue that gold's place in asset allocation models was left in the 1980's. For far too long financial professionals have viewed gold as a relic, something that should only be invested in by tourists visiting the gift shops adorning the streets of historical gold rush cities. Instead of using the metal's fantastic record of inflationary protection to hedge client wealth against erosion of purchasing power, they have treated it as the black sheep. In all fairness, you could hardly blame them for following the lead of institutions.  

So with "safe" money languishing in U.S. treasury paper destined for higher yields, and institutional coverage of the mining sector at all time highs, will this burgeoning institutional interest in gold as a store of wealth be enough to propel the retail public into the gold market and send the metal off to the races?  Will financial advisors follow the lead of institutions and start putting gold in its rightful place? Only time will tell.  My guess is SPDR Gold Trust (NYSE: GLD) and Market Vectors Gold Miners ETF (NYSE: GDX) which is sector speak for YES.

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