The UTIMCO Bullion Buy: Prescient, or Political?

From aiCIO Magazine's Summer Issue: Was the gold purchase by the University of Texas Investment Management Company (UTIMCO) a prescient investment, or a political statement?

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The April purchase of nearly $1 billion in physical gold bullion by the University of Texas Investment Management Company (UTIMCO) is raising questions among endowments, think tanks, and asset managers: Was this a prescient investment, or a political statement?

“Gold has had a huge run-up—which suggests a bubble,” says Dean Baker, Co-Director at the left-leaning Center for Economic and Policy Research in Washington, who has previously warned about institutional investors overallocating to gold. “I would not consider investing in gold. I assume they expect higher inflation, but I don't understand it. I think it's silly. In this case, I don't see why UTIMCO would do this.” According to multiple news reports (but denied by CEO/CIO Bruce Zimmerman), UTIMCO executed the purchase of 6,643 gold bars—to be stored at an HSBC vault in New York City—at the behest of Kyle Bass, a UTIMCO investment board member and Managing Partner of hedge fund Hayman Capital Management. The allocation equals 5% of the system's total assets. The investment thesis, according to sources, is predicated on the idea that, if even 5% of COMEX futures were called, the company would not have enough physical gold to meet demand. “If you own a paper contract where they can only deliver you 10 cents on the dollar or less, you should probably convert it to physical,” Bass was quoted as saying in April.

“I think, clearly, that politics are a big factor—someone wants to blame the Obama Administration,” Baker states. “They think investing in gold is a way to counter that. If you think Obama is destroying the economy, you want to have pounds of gold. That's the story. They really think we're on the edge of this huge collapse—and the only thing good is gold. I think that's crazy.”

Regardless of potential political motives, however, UTIMCO's method of purchase— physical delivery and storage—is clever on at least one level: The storage of physical gold in such quantities is cheaper than accessing the market via exchange-traded funds, according to Bloomberg. At current prices, it would cost UTIMCO approximately $1 million to store the delivered bullion— much less than the $4 million that an ETF provider such as SPDR Gold Trust would charge for that much exposure.

Baker, however, raises concerns over liquidity—and what would happen if a quick sale were necessary. “The premise is that we're in uncharted territory,” he says. “I don't know what people envision. If we're in a situation where it's every person for himself, I really don't know. Gold is not great with liquidity. You'll always be able to get something for gold, but you can't guarantee a price.”

Inflation concerns also are credited with the UTIMCO gold buy. “We are hedging against the devaluation of currencies such as the dollar, euro, and yen because of the monetary and fiscal stimulus that has taken place,” Bruce Zimmerman, UTIMCO president, was quoted as saying in a local Texas newspaper. However, multiple endowment managers contacted suggest that this conventional wisdom is out of step with reality, and that gold is far from the hedge it is thought to be. Baker agrees. “It's not a good predictor,” he says. “People turn to gold as a hedge against inflation but, since it has already risen, you'd have to have an awful lot of inflation to justify current gold prices.” Adam Tosh, a consultant with Rogerscasey, agrees—with a caveat. “I don't disagree that gold is not a good predictor of inflation, but investors seek a safe-haven from inflation with gold...[thus] gold could continue to run if people fear inflation will be higher than it is,” he says. Recent academic work on the subject is decidedly mixed.

As with any investment, price matters—and some think that buying gold at record levels suggests a bubble. “It's like buying into the housing bubble at an all-time high,” Baker asserts. “You end up a big loser.” Whether UTIMCO will end up as such is at the whims of many a gold bug, of course. It is so-far-so-good for the fund, which executed the purchase at approximately $1,500 per ounce, a price that has remained relatively stable through press time—and seems likely to continue as global growth remains slow and as the American Congress delays any solution to the impending debt ceiling issue. In this light, perhaps the UTIMCO bullion buy isn't simply prescient or political. It's both. —Paula Vasan and Kip McDaniel