A Norwegian Gold Allocation Would Counter Sovereign Incompetence Risk

Submitted by Alexander Grover in Oslo, Norway

A Norwegian Gold Allocation Would Counter Sovereign Incompetence Risk

The Norwegian Oil Fund (The Government Pension Fund) or “The Fund” belongs to the Norwegian people, investing surpluses from domestic oil activity. NBIM (Norges Bank Investment Management), established in 1990 by the Norwegian Parliament, receiving initial funds in 1996, manages the mandate. Currently, The Fund invests 60% in equities, 35% in Fixed Income (bonds) and 5% in real estate, allocating 39% in Europe, 39% in North America, 18% in Asia and 4% everywhere else. Adjusted for inflation and management overheads, the average annual return between 1998-2014 is 6.3% in USD terms, beating the S&P 500 4.2% annual return (inflation adjusted and reinvesting dividends) during the same period.

Although successful in the past, the current situation, considering energy and the global economy, warrants a critical reassessment of their investment strategies. The Fund needs to perform better now that oil prices are below the necessary $70 per barrel, which balances the budget. Norway started to withdraw from The Fund, shoring up deficits amidst a slowing economy. Moreover, global stock markets are retreating, and fixed income (bonds) may have peaked. The Fund invests a small portion in prime real estate in New York, London and Singapore. However, this may also be at a peak with finance sector turmoil.

None of these factors, driving the present situation, were forecasted by mainstream financial media or academics. The greatest risk to The Fund is the lack of Norwegian government and Norges Bank (Norwegian Central Bank) crisis experience. Central Banks are biased towards inflation, but not getting it, risking an overshoot in the future. Mismanagement could cause The Fund, which has taken two generations to accumulate, to disintegrate over the next five to ten years, filling budget shortfalls while the overall value declines. Therefore, The Fund must to protect itself, adjusting allocation, from current and unforeseen risks. This is the case for The Fund to invest 5% of overall holdings in to physical gold:

Norwegian “Economic Expert” Risks:

Oil Extraction Technology: One of technology’s goals is to turn scarce resources into abundant commodities (i.e. aluminum and salt were overcome with technical advances). We can expect extraction and refining technology to keep advancing while engines and machinery, which consumes oil, increase in efficiency.

Norwegian labor laws would make this bucket cost ca. $100. Therefore, fried chicken is not a viable export.

“One barrel of oil equals one full grown salmon” I have done extensive research on fish farming. It’s good business but can’t cover oil losses. Moreover, as Salmon prices rise, nations with cold water and coastlines (Japan, USA, Canada and Russia) will get into the game as prices rise.

Shale Bankruptcies and Consolidation in the American oil industry continues to lower long term operating costs. Oasis petroleum, improving efficiency, reduced their long term operating cost from $66 to $50 per barrel.  The operators unable to adapt will go bankrupt, selling their equipment, exploration data and wells at distressed prices. The new driller will enjoy much lower CAPEX, helping reduce operation costs. Shale wells can be started and stopped with minimal losses whereas traditional ones are significantly less productive when restarted. Consolidation is just beginning. The EIA (Energy Institute of America) estimates that the Permian, Eagle Ford, Bakken, and Niobrara fields could break even at $25 per barrel.

At $50, these rigs will be put back to work by new owners, receiving substantial discounts. Robotics and Industrial Revolution 4.0 will further reduce OPEX!

Unreliable Forecasting:  Reviewing the Norwegian State Budget, one can see that forecasting was mostly rearward looking, averaging prices from previous months in the past year and then making some conservative adjustment ca. 10%. However, this year, the forecast appears to be way off as oil treads water at $30/barrel while the EIA (Energy Institute of America) and API (American Petroleum Institute) more often report above forecast output and inventory than lower. The latest report, published on January 26, 2016, shows an upside blowout. Crude supplies were at 11.4M barrels vs. 3.5M expected. Furthermore, fracking opens up new reserves, not economical before, turning Ukraine and Poland into another Bakken.

Ministry of Finance

Budget Assumption






Assumption in NOK






Assumption in USD






Actual Oil Price USD





Est 37

Norges Bank FX*






2016 Rate is YTD as of 24.1.2016 (2013-2016 assumptions from 2015 revised budget summary)


The charts below, from DnB, Norway’s largest bank, (and the one calling for a cash ban) indicate constantly changing predictions:  

Source: DnB Group: Oil Related Portfolio Update by the Global Head of Energy: New York February 27, 2015

Source: DnB Markets Oil Market Prognosis: January 2016 Report.

Therefore, forecasting (guessing) is an inexact science at best. The fortune tellers, working along Karl Johan (Oslo’s main street), may offer better insight at far greater cost than government experts.

US Economic and Political Risks: Although the United States, regarded as the world’s safe-haven, displays strength and does innovation better than anyone else, there are huge underlying risks. The Fed, like NBIM and other Central Banks, is trapped in a box.  If they raise rates, they could derail the fragile recovery or spark a bond market sell-off. If they hold or rollback, their credibility comes into question and dollar drops. However, there is even negative interest rate talk. This inflationary move would significantly weaken the dollar, devaluing NBIMs holdings, assuming steady stock prices. As we can see from the chart below, inflation moves in large increments, central banks then rush to contain it, drastically raising rates.

It is not safe to assume that lower or negative rates boost stocks. US Corporate earnings and growth rates factor more than prevailing interest rates.  Although I do not personally regard Donald Trump as a political risk, the global financial sector does. If the US economy starts to struggle around November and he gets elected, there is no telling what markets and the USD will do.

Source: Seeking Alpha - The US Economy Vs. Fed Policy At A Glance

NBIM’s invests around one-third in the USA, including Apple and real estate (RE). Prime American RE is a good long term bet. However, only 5% of The Fund’s strategic allocation is RE, currently holding at three percent. Recently, Apple outlook took a 180-degree turn.  They appear to have peaked at ca. $518 billion market cap. There were optimistic predictions, not too long ago, for Apple to be the world’s first trillion-dollar company. Apple is one of NBIM’s largest holdings.

NBIM website on January 27, 2016

Therefore, the USD and American exposure that has been helping The Fund could work against them. If the US starts to slow down, it could affect other markets, namely Asia and Europe, where NBIM also has substantial exposure.  

Black Swans:  There are many unknowns that could adversely affect The Fund. The following are 2016’s most discussed “tail risks:”

Europe is falling apart. Barclays stated that a successful exit vote would turn the UK into a safe haven, encouraging others to leave, collapsing the European Union. They further state that these risks have not been properly accounted, calling this one of the world’s most significant risks in 2016.   Global recession risk negatively impacts oil demand, furthering Norway’s economic woes. China is landing hard but it’s difficult to tell how severe. Data, deemed unreliable, further exacerbates the problem.  The world, flooded with debt, becoming more uncertain every year.  Norway is not immune from this and therefore requires further safeguards.

The Norwegian Government Lacks Crisis Experience:

Things have been quite good in Norway since the 1980s. Hence two generation experienced prosperity, led to believe that this will go on forever by an overly optimistic media and government. Norwegians, like Americans in the past, were led to believe that housing will always go up, dropping all their wealth in real estate. The NOK crashed so fast, catching many “experts” by surprise. They have a dilemma:

  • Cutting rates is inflationary, further pumping up asset bubbles, namely housing. However, with massive job cuts, namely in the well paid oil sector, housing is starting to flatten out. Low interest rates won’t help much if people don’t have jobs to pay inflated mortgages. SEB predicts that the USDNOK to break 9.00 in 2016.
  • Holding or raising rates could crash the housing market. However, in dollar terms, the housing market has already crashed (NOK vs. other currencies). This effect also extends to other assets, namely productive companies, making them susceptible (“cheap”) to foreign acquisition. The company, under foreign ownership, will continue to do the work in Norway but the profits will be taken offshore.

The bias in Norway is like everywhere else, looking for an easy way out. Cut rates, inflating to save housing and the stock market, “kicking the can down the road.” Øystein Olsen, Norwegian Central Bank governor, just like Janet Yellen, engages in “open mouth operations.” He is attempting economic “Jedi Mind Tricks” on the Norwegians:

“We think the economy will turn around in the summer of 2017,” Olsen told Aftenposten. “That’s when both exports and private consumption will start to rise. We aren’t drawing a gloomy picture.”

Therefore, Norwegian leader is navigating uncharted waters, never seen before.

Norway is one of the only “rich countries” without a gold reserve.

Many believed that the NOK was backed by oil, not requiring a gold reserve. However, oil is no longer a scarce resource but an abundant commodity. Switzerland, Germany, America and other first world nations have gold reserves. Norway should have one too! Ever since oil started moving downward, starting 2014 and the NOK following, gold started moving up significantly in NOK terms:


























Source: ycharts.com, Bullion-Rates.com and XE.com

Gold, perceived negatively by many, is being taken seriously by some very smart and rich people. The University of Texas Investment Management Company, the second largest university endowment in the USA, took physical possession of their gold, amounting to $1 billion. Kyle Bass, who saw and capitalized on the US sub-prime crisis, advocated the move from the NY Federal Reserve Bank Vault to the Texas repository. Gold is not only for cowboys and crazy people. Recently, some very rich and smart people have bought large quantities of gold. Moreover, Germany, Belgium, Holland and Austria are repatriating their physical gold.        

Gold prices, relatively low compared to the amount of currency printed, offers NBIM a unique opportunity. They could liquidate 5% of their riskiest assets, allocating the proceeds to physical gold. This would give the Norwegian people insurance. They would have the most gold per capita and eight largest gold reserve overall, displacing Switzerland. Moreover, Norway’s abandoned mines, many of which are being turned into super secure data centers could also be used for storage. Norway could further extend storage to private persons and commercial entities, leveraging their reputation for trustworthiness.


Gold will protect Norway from unforeseen events, economists and politicians.

Source: Wikipedia and ThePrudentInvestor.com sourced from World Gold Council.  


The prognosis for the global economy is not good. The oil price collapse appears to have caught the Norwegian policymakers off-guard, and perhaps they were thinking the situation is temporary. However, technology today is much more advanced than in the past, making oil extraction faster, easier, safer and cheaper. Moreover, OPEC, Russia, Iran and North Dakota are in a pumping frenzy. Norway needs $70 per barrel to breakeven. Getting to $50 will be a challenge.

My previous articles argue for a long term solution. However, the short term prognosis requires immediate action, hedging the “The Fund” against unforeseen risks including the managers themselves. Central Banks, including Norway’s, are inclined towards rate cuts and NIRP (Negative Interest Rate Policy), setting the stage for inflation.  Historically, we have seen inflation run away while policy makers try stimulate. Before experimenting, NBIM should offset this risk by investing into physical gold, giving the people a solid base during crisis. Remember, these are the same policy makers, along with mainstream media, that encouraged Norwegians to put most of their money into housing. Despite numerous warnings, this bubble continues to grow. 

We expect NBIM to do the obvious. They will cut rates. Once they are at zero, they will go to NIRP, do quantitative easing (QE) or both. I do not expect NBIM to buy gold. I came to Norway almost three years ago. I found a job, dutifully paid my taxes and learned the language enough to read the business newspapers. This summer I will become a permanent resident and in 2020 a citizen.  Therefore, “we," meaning all of us contributing to Norwegian society, must take some precautions, protecting ourselves from big mistakes and serious miscalculations.

This is how to prepare for the coming economic winter:

  • Get a Dale Sweater, heavy knit and wool, made in Norway. It’s not only warm and supports the economy but also helps you blend in.
  • Get a gold chain, bigger is better and put some King Harald 1500 NOK gold coins your pocket. They will protect you from inexperienced economists and politicians. 
  • Wear sunglasses during daylight hours, protecting yourself from UV risks and facial recognition software. 
  • Wear a hat. It goes with the sweater and glasses, making you look cool.