I've worked on Wall Street my entire life, and one thing I've learned is that large institutional investors, like pension funds and endowments, rarely veer from the herd. They manage too much of other people's money to stick their necks out alone-if their investments go bad, at least they can point to everyone else who fared just as poorly.
For this reason, these funds are often lagging in their perception of crucial market changes-changes such as a doomed currency. While many of us are buying precious metals to hedge against the collapse of the dollar, gold and silver have been taboo investments on Wall Street for years. Fund managers are taught that gold is a “barbarous relic” – much better to stick with government bonds and blue-chip stocks. That's what everyone else is doing.
But there are early signs that the herd is changing direction.
In a remarkably under-reported story, the University of Texas' endowment fund-the second largest in the country, after Harvard's-added about half of a billion dollars worth of gold to its portfolio just this month, on top of the half-billion it purchased several months prior.
The university's endowment now owns a staggering 6,643 bars of bullion (664,300 ounces) – which have already appreciated by nearly $40 million since mid-April , when the bars were delivered to a dedicated HSBC-owned vault in New York City. Not a bad start.
Kyle Bass, the well-known Hayman Capital hedge fund manager and UT endowment board member, advised the university on the purchase. He stated his reasoning plainly: “Central banks are printing more money than they ever have, so what's the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can't print any more of.”
Apparently, the university agrees that sitting on a pile of fiat paper is an act of faith not befitting a prudent and enlightened institution.
The purchase is certainly causing a few heads to turn.
Now that a major endowment has taken this step, other fund managers are going to be emboldened to follow through on their gut instincts. These are smart guys, after all; they are aware that although their funds may be posting nominal gains, they are losing much more in purchasing power. I wouldn’t be surprised if many have privately bought precious metals, but now they have cover to do so professionally.
Perhaps the most interesting part of UT's billion-dollar repudiation of Fed Chairman Bernanke and his printing press, however, is that the fund demanded physical delivery of the bullion. While more commonplace in Europe, this is truly unprecedented for a stateside institution.
To my mind, the delivery of physical bullion suggests at least two important implications. The first is that UT perceives gold to be a long-term strategy for wealth preservation, as opposed to a short-term speculation. The second is that UT must be somewhat concerned about the stability of financial markets in general – it wants to own physical gold safely stored in a vault, as opposed to owning paper claims or other instruments with counterparty risk.
I have long recommended that investors hold at least 5-10% of their portfolios in physical precious metals. UT's $1 billion position represents roughly 5% of its $20 billion endowment.
If endowment after endowment were to decide to sell billions of Bernanke's dollars and diversify into gold, what might this do to the gold price? If these colossal funds start getting the idea that holding 5% of their portfolios in gold is more conservative and intelligent than holding the current average of 1%, what would this mean for gold demand? I think the answer is clear.
If US university endowments were to increase their gold positions from the current average of 1% to an average of 5% of their portfolios, it would equal $20 billion, or roughly 400 metric tons of gold at today's spot price.
Beyond endowments, private foundations in the US, with 2010 assets totaling nearly $600b, would similarly require nearly 600 metric tons of gold if they sought to hold 5% of their assets in the metal.
And again, these are just US endowments and foundations; there's a whole world beyond our borders.
The point here is simple-the total potentially investable funds around the world are significant relative to the size of the current gold market. It's not hard to perceive what a simple move from 1% to 5% of average portfolios would do to the price of gold, and this is why the University of Texas' bullion delivery is so important – it's a vivid indication that such a move may now be taking place.
Gold remains widely neglected among the big money players, but it's clear that they're beginning to come to terms with the negative prospects for the US dollar. After all, while fund managers don't want to veer from the herd, they also don't want to follow the herd off a cliff.
The University of Texas, with its billion-dollar stash of physical gold, is one institution that has finally seen the cliff. The physical delivery of this purchase exemplifies the severity of the threat that UT's endowment board perceives.
We may be on the cusp of a smart-money gold rush. If so, it could drive gold to a record in real terms, even before retail investors join in.
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