Traditional Holders of Dollars Begin To Diversify
This week, Bloomberg News reported that Northwestern Mutual Insurance had bought gold for the first time in the Company's history.
Bloomberg - June 1, 2009
Northwestern, the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in 152 years to hedge against further asset declines.
"Gold just seems to make sense; it's a store of value," Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor's in Brooklyn. "In the Depression, gold did very, very well."
Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken.
This story is remarkable for many reasons.
First, an insurance company buys cash-generating assets to match future cash payments, whereas gold does not produce cash flows. Northwestern has been in business during wars, recessions, boom times, high inflation and deflation, yet never before has the Company bought gold. The 152-year period also includes the devaluation of the Dollar in 1933 and the elimination of the gold standard entirely in 1971. However, now that the Federal Reserve is printing money, leveraging its balance sheet and monetizing debt to manipulate interest rates, Northwestern has made the decision to buy gold.
Second, Northwestern's decision demonstrates its concern about the US Dollar. If Northwestern was only worried about inflation it could buy Treasury Inflation-Protected Securities (TIPS). TIPS will protect against inflation (if inflation is calculated correctly), but leaves an investor open to currency risk. Gold provides Northwestern protection against the falling Dollar as well as inflation.
Lastly, insurance companies (as represented by Northwestern Mutual's $114 billion of bonds and mortgage loan portfolio) are traditional buyers and providers of credit to the US financial system. By the Company using $400 million to buy gold, Northwestern Mutual is not only taking money away from the US credit markets and US consumers, but it is also selling Dollars, which in turn positively reinforces the buying of more gold and selling of more Dollars by other investors.
Northwestern's decision to own gold cannot be ignored because it is another sign of a traditional owner of US Dollars losing faith in the value of the Dollar.