January 6, 2012

Pension Fund SPVG

In case you missed it, this is about a small Dutch pension fund (SPVG) that became world news. This alone can be called an achievement as this pension fund invests for a stunning number employees of 1142. So what was the reason they became world news?
That's because this fund has been ordered to sell a great part of their gold bars (physical) due to a court ruling. Most interesting part, this was brought to court by the DNB (Dutch Central Bank). And as often, Zerohedge was quick in it's conclusion : "This latest gold confiscation equivalent event is most certainly coming to a banana republic near you.". Link

But why did the fund had to bring down it's gold holdings? There were several reasons.
- As other pension funds invest in commodities ( I know, we're talking about gold here...so in my opinion certainly NOT a commodity) with an average 2,7% of their portfolio, SPVG was invested for 13% in only gold.
-The funds' actions we're contradictory to the Goldman Sachs Commodity Index (GSCI) were the amount of gold is only 3,13% of all commodities. As part of all investments, gold would only be 0,5% instead of 13%.

This would make the fund to dependant on one single investment. There is a law (article 13, FTK) that forbids this dependency for al pension funds. There is one exception (article 135, PW). Pension funds are allowed to invest more in one particular thing, bonds. This was at SPVG almost 78% when DNB went to court. Did you know, as a citizen of the Netherlands, that your pension depends on mostly the profits on bonds? And to go further on this, that the debt of the most indebted country's is actually your asset?
So what the court ordered was to lower the exposure to gold. Somewhere between the 1%-3%.

But why wanted DNB the fund to bring down its exposure to gold? Is it really only because of the risk of price volatility or overexposure?
I personally find this hard to believe.
With the one exception on investment exposure highlighted again namely bonds, I think this is what this is all about. Pension funds are simply most allowed to invest in bonds. And as such an organisation they have to act like that. Doesn't this conflict with the interest of it's participants?
With the interest on bonds falling diminished the profits. And as a lot of funds had invested in south European bonds under this rule, there still is a great counter-party risk. There is the risk of the debt not being paid back.
This in mind, it isn't strange for Dutch central bank president Knot to warn for pension cuts up to 7% in the coming year 2013 for approximately 40% of the pension funds.Link

So why isn't the DNB encouraging all pension funds to buy physical gold? When you look at the profits made the last ten years, it's far from volatile.  Or at least a part, as this would be to the best interest of it's members. Is this a possibility? Let's take a closer look on the value of the investments combined.
With a combined value of  €790 Billion the Dutch pension funds are relatively big to other European funds.
This is because in other country's pensions are more invested through insurance company's.

When all the Dutch pension funds would do the same as the SPVG and keep 13% in physical gold. This would come down to €102,7 Billion. With the current price of €41.000/kilo, this equivalents more than 2500 metric ton.
With an annually mining output of 2652 metric ton (2010) this shift of demand would almost  take away all the newly mined gold! And this is just for the Dutch pension funds. Could this issue play a role here?

The SPVG appealed against the verdict, but was during this appeal forced to sell. Cased closed you think? Think again!
The court ordered DNB on (7-12-2012) in a between ruling to come up with a better motivation on the statements made. It was not adequate . Link

So the case is far from closed. This could be a game-changer if the charges will be dropped. DNB didn't want to comment on this case but my guess is they came up with more and better motivations. And as Zerohedge is often very quick with their reactions and judgement, Tyler missed this one. Leaves us the question is gold just an average commodity? Or is there more to it?

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