I have 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.
THE CURRENCY
THAT CAN'T BE PRINTED
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 over $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.
AN
INSTITUTIONAL AWAKENING
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'm sure 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.
The delivery of physical bullion has 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, so it wants to own physical gold safely stored in a
vault, as opposed to owning paper claims, shares of gold funds, or other
instruments with counterparty risk.
HUGE
RAMIFICATIONS
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, so
they have reached my minimum recommendation - but likely have more
buying to do.
As endowment after endowment decides 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 portfolio in gold is more conservative and intelligent than holding the
current average of 1%, what will this mean for gold demand? The answer is
obvious and the ramifications huge.
ONE SMALL
STEP FOR INSTITUTIONS, ONE GIANT LEAP FOR GOLD
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. This is significantly more than the entire yearly gold production
of China, the world's largest producer.
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 - almost
twice China's yearly production.
And again, these are just US endowments and
foundations; there's a whole world of demand beyond the borders - and we
can't forget sovereign wealth funds (SFWs).
The largest SWF in the world, Abu Dhabi Investment
Authority, has assets worth over $600b alone. The second and third largest
funds, Norway and Saudi Arabia, together constitute roughly a trillion
dollars in assets.
GETTING IN
BEFORE THE HERD
The point here is simple: the total investable funds
around the world are immense relative to the size of the gold market. It's
not hard to perceive what a simple move from 1% to 5% of the average
institutional portfolio would do to the price of gold, and this why the
University of Texas' bullion delivery is so important - it's a vivid
indication that such a move is now 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 US
dollar's terrible prospects. 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.
The average investor should recognize that there is
little time left to purchase precious metals before substantial new demand
drives the price of gold higher. A very small percentage change in large
institutional investment is all that's required for massive gold price
increases.
I believe we are on the cusp of a smart-money gold
rush. It will drive gold to a record in real terms, even before retail
investors join in. Though you may have missed the last decade of gains, there
is still a chance to buy in before the stampede.
Peter Schiff
For
the latest gold market news and analysis, sign up for Peter Schiff's Gold Report, a monthly
newsletter featuring original contributions from Peter Schiff, Casey
Research, and the Aden Sisters. Click
here to learn more.
Peter
Schiff is
CEO of Euro Pacific Precious Metals, a gold and silver dealer selling
reputable, well-known coins at competitive prices. To learn about our
products and policies, please visit www.europacmetals.com
or call at
(888) GOLD-160.
|