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Opening: Overture I
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Salt
Salt has been important to humanity for life on this planet. The word "salary" comes from sal, or salt, which was part of the pay of Roman soldiers.
African and European explorers traded an ounce of salt for an ounce of gold salt was literally worth its weight in gold.
Salt is important to many biological processes, but too much salt can hurt you, but the same can be said of most things even oxygen and water.
Agenda
Economic Perspective Financial Institutions Increasing Risk Risk Perception & Manipulation Linear Thinking In Between Conclusion Gold as Asset Class Change to Gold New Solutions Conclusion
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L A A/L
Source: Towers Watson
Conclusions Global pension fund balance sheets worsened during 1998-2011, losing 25.4% in the A/L indicator A/L Indictor lost 4.3% in 2011 The growth in liabilities exceeds by far the growth in assets
Source: Rubbaniy
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Advice Commission Parameters Fixed Income : 4.5% Listed Stocks: 7.0% Other Stocks & real Estate: 7.5%
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1. Conclusion DNB Actual performance 2000-2010 is 0.2% better than own defined benchmark 2. Other Conclusions Compound average performance (4.2%) equals arithmetic average performance Average performance (4.2%) < 10Y Eurobonds performance Theres no pay out on risk!!! Source: DNB
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ESM may demand an unlimited amount of money from European countries ESM is not accountable for what happens to the money ESM has the power to reduce private customer savings There are no compliance or control measures defined ESM has no targets, cost-limitation and enjoys complete immunity.
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Risk Perception & Manipulation Intermezzo: The Actuary as Risk Manager II Where are we today?
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30 1 2
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Risk Perception & Manipulation Artificial Discussable Market & Liability Value
Market Value Manipulation Artificial FED & ECB rates: 0-1% Consequences: 1. 2. 3. Minimalized T. Bond rates Pushed Stock Markets Push backed Inflation
Discussion 1. Market Value is artificial and a pension fund killer 2. 5-10Y Average Market Value Control is more adequate 3. Liability Risk Premium?
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Robust herding behavior in investments of Dutch pension funds Overall (LSV) herding level of 8.14% (significant at 1% level !!)
Possible explanations 1. Big Brother Hedge (imitation of large pension funds) 2. Outsourcing: Strategy and Asset management to the same large and reputed asset management firms 3. First Mover Risk
Source: Rubbaniy
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STRONG REGULATION
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DYNAMIC REGULATION
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In Between Conclusion Way out: explore new ways and change system
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All the above-ground gold in the world (start 2012): Weight: 165,000 metric tons (165 million KG) Volume: Fits in a 20m x 20m x 20m Cube Value: Roughly $9 trillion Yearly production: 2500 metric ton (2,5 million KG)
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Nominal gold price (yellow) CPI 1 (red line) is calibrated for gold price at the beginning of the period. CPI 2 (green line) is calibrated for gold price at present.
Bron: The Gold Report (2009) & WGC: Gold as an asset class (2011)
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Gold as Asset Class FEDs Gold Backing: The End of FIAT Money?
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Chart 1
Gold price increases substantially in crisis scenarios
Chart 2
Gold as an Euro inflation hedge
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The main reason why gold adds significant diversifying power is its low or negative correlation with most other assets in an optimized portfolio context. We use Conservative return premium assumptions consistent with available long-term data and the presumed role of gold as an inflation-hedge. The more conservative the assumptions the more likely any significant findings may be reliable for long-term investing.
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Gold is an exceptional commodity and behaves not like other commodities Gold is the only monetary metal. Silver follows at a distance
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Gold as liquidity
Gold is the most liquid financial product during crises to cover derivative positions, and is 24h a day traded (Comex New York, LBMA in London, Switzerland, 24 hours electronically through Globex, PAGE in Hong Kong )
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In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
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Gold as Asset Class Vision: Prof. Dr. Ruud Kleynen, April 2011
It looks like gold performed best over the analyzed period Only gold finally was able to meet required return levels based on indexing ambitions Traditional stock markets did not do such a good job Gold could be seen as a safe haven in periods of economic distress Long term expectations for gold look interesting Should the traditional construction of portfolios be reconsidered?
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Gold as Asset Class Vision: Ir Dennis van Ek AAG, CFA , May 2012
Summary Article Investing in Gold (Kluwer) 1. Gold is an asset class, no sub-asset class or subset of commodities 2. Gold offers purchasing power protection (scarcity, value quality, worldwide) 3. Gold is the basis of our monetary system 4. Central banks keep gold, no commodities 5. Optimal gold allocation in a portfolio: 5-10% 6. In times of crisis: allocation >10% 7. Long term better 'performance with gold in a portfolio: + 0.15% (equal risk)
DNB Annual Report 2010 In times of financial crisis, DNBs physical stock of gold serves as an ultimate reserve asset and as an anchor of trust. Gold is also held for diversification reasons.
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Is it an idea to invest in gold? The investment committee could suggest that, but in practice this has not happened yet.
Nico van Wieringen, Controller Participations at KLM, in conversation with the Chairman of the Participants Council: Frans Reder.
Source:Focus
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IC: Here were back with more than 15,000 economic scenarios! PB: Impressing! Whats in it for Return and Volatility? IC: Its all in there, a mix of historical returns, asset mixes, horizons, crises, whatever you can think of. All designed by our experts! PB: Wow!! Looks great But whats that blue line over there? IC: Thats one of the more unlucky crisis scenarios PB: We dont like that one, Its outside our Risk Appetite IC: O.K., well hedge that scenario away.. Further we can minimize downside risks with derivatives. PB: And whats the strategic asset mix? IC: Its all dynamic and risk based, you dont have to care about your mix, our strategic scenario-generator takes care of that. It operates like an autopilot on your Strategic Asset Mix. PB: O.K. Thanks a lot. How to set up an investment mandate on this? IC: Dont worry, well define a dynamic investment mandate for your asset manager. PB: And what about reporting? IC: No problem, well take part in your Investment Advisory Committee (IAC) and pre-comment on every AM-report. PB: We all agree on all your proposals. Thanks for helping us OUT!!
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Conclusions Pension board Training Economic Skills Define your own Strategy and Risk Appetite
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Discussion Should we, actuaries, become more active on the asset side of the balance sheet
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Actuaries that can not only analyze numbers , but are able to explain how risks and goals can be achieved.
The ability to think backward is essential in this process.
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Jos Berkemeijer : Start-Up Director at GSCG Market Intelligence T: +31 646 12 06 60 E: jos.berkemeijer@gmail.com
Martijn van Eck: Program Manager a.i. at GSCG Market Intelligence T: +31 652 56 87 75 E: vaneck@gscg.nl
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Specific documents
1. 2. 3. 4. 5. 6. 7. WCC: Gold: Hedging against tail risk (2010, October) WGC: Gold as a source of collateral (2011, May) WGC: Gold as a Strategic Asset (2006) Safehaven: Going Back to a Gold Standard? (2010) WGC: Gold: alternative investment, foundation asset (2011) WGC: Gold as an asset class (2011, January) WGC: Liquidity in the global gold market (2010)
Internet publications
1. 2. 3. 4. 5.
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Striking Portfolio Balance with Gold Stocks (2011, December) Adding Gold To An Equity Portfolio (2011, October) The role of gold in your investment portfolio (2009) Gold, Silver and Pension Funds Portfolio Diversification Myths (2011, July) USfunds (2011)
GSCG Market Intelligence All Rights Reserved
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Thomas M. Idzorek, Portfolio Diversification with Gold, Silver and Platinum Further, Hillier et al, Do Precious Metals Shine: An Investment Perspective Jedrzej P. Bialkowski, Martin T. Bohly, Patrick M. Stephan and Tomasz P. Wisniewski, Is There a Speculative Bubble in the Price of Gold? Dirk G. Baur and Brian M. Lucey, Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold Dirk G. Baur and Thomas K. McDermott, Is Gold a Safe Haven? International Evidence James Ross McCown and John R. Zimmerman, Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals Massimiliano Marzo and Paolo Zagaglia, Gold and the U.S. Dollar: Tales from the Turmoil World Gold Council, Gold as a Source of Collateral World Gold Council, "Gold: Hedging against tail risk"
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