Triumph of gold, the anti-investment

April 21, 2011

In investing, extreme behavior is becoming more mainstream every day.

How else can we interpret the extraordinary moves by the University of Texas’ endowment fund to not only buy nearly $1 billion of gold, equal to about 5 percent of its assets, but to insist on taking physical delivery of the precious metal.

Things really have come to an interesting juncture when the second-largest academic endowment in the U.S., managed and advised by sober, rational people, decides that what they need is insurance against getting, in essence, robbed, via inflation, by fiscal and monetary policy.

Little wonder that gold futures went above $1,500 per ounce for the first time on Wednesday, driven by a laundry list of concerns starting with a falling dollar and not ending with the growing chance of “debt restructuring” (well, default, if you insist) by Greece.

“The role gold plays in our portfolio is as a hedge against currencies. The concern is that we have excess monetary and fiscal stimulus,” Bruce Zimmerman, chief executive officer of The University of Texas Investment Management Company told CNBC television.

While Zimmerman said it was easier and more economical for the fund to physically accept the gold, which it is paying to store in a vault presumably deep below the sidewalks of New York, rather than the more usual route of buying a derivative contract, the move also must reflect concern about the risk of those contracts not being honored. To that extent the investment is not only protection against inflation and currency risk, but against market failure as well.

Zimmerman has described gold as an “anti-currency,” as,  being in limited supply, its value can’t be degraded by central bank-engineered inflation and devaluation. You can’t turn on the printing presses and make more gold, a slender but apparently important virtue.

That’s a legitimate concern, though the kind of scenario that would only have been raised on the most feverish message boards until a couple of years ago. Since the second round of quantitative easing was signaled last August the dollar has fallen about 11 percent against a trade-weighted basket of currencies.

The dollar has fallen particularly hard in recent days, even against the beleaguered euro, after Standard & Poor’s put the U.S. on warning that it has a one-in-three chance of losing its AAA debt rating. Some of the same fears that drove S&P’s move are driving the gold market; the idea that the U.S. will not get its act together to agree budget reform and, in becoming a worse credit, sees the dollar weaken precipitously.

THE ANTI-INVESTMENT
Rather than being an anti-currency, gold is really an anti-investment, not because it can’t pay off, but because it is the one asset that not only protects you against the bad actions of others but actually rewards you for them.

If central bankers and politicians bring on massive inflation, gold goes up. If the U.S. threatens to slouch or leap towards default, gold goes up.

The opposite of buying gold perhaps is to buy equities, because you are betting on creating products, jobs and wealth rather than just protecting yourself. On the other hand, a bar of gold has no executives that can loot the company or accountants that can aid in fraud.  Really the world in which an investment in gold makes you rich is not a very appealing place.

In some ways you can look on capital flowing into gold as a kind of unexpected cost of current monetary policy, just as putting bars on your windows is a cost of living in a dangerous neighborhood. Both divert money away from more productive causes in service to security.

It is really hard to say which is more remarkable; that people are behaving in ways that might have been labeled as paranoid a few years ago or the rise of things that plausibly might make them worried.

The lack of safe alternatives to the dollar is also doubtless driving money to gold. While the euro has rallied against the dollar on expectations of further interest rate rises, its policies towards its ailing member states are in a shambles. There is a real risk that a restructuring by Greece and continued problems in Ireland and Portugal cause contagion to Spain, an economy big enough to call the whole project into question. Electoral gains by a nationalist party in Finland that rejects bailouts only adds to the potential difficulties.

China, though supposedly keen to promote the yuan as an alternative to the dollar, is still partly a closed economy for outside investors. Japan, recovering from disaster and facing huge demographic challenges, is also, though open and big, hardly appetizing.

Gold, then, is a profoundly pessimistic and depressing investment. In current circumstances it also, unfortunately, has a heck of an elevator pitch.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email: jamessaft@jamessaft.com)

13 comments

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Everybody knows that the gold and silver prices have been artificially suppressed by a bankster cartel to keep the fiat currency afloat as a giant Ponzi scheme in which they are selling far more ETFs than actual physical gold. Everybody knows the government is corrupt and fascist run by the banks; we no longer have full faith in the US dollar nor its leadership. We revert to sound currency. Gold has been used thousands of years and is going to be used again. Stop your desperate propaganda attempts to thwart what is about to happen. The dollar crashing and gold standard returned.

Posted by PalomaBlanca | Report as abusive

I screctly hope that vast gold reserves beyond all estmates are discovered the cost quickly down to the $500 range or less, so we can stop this expanding flow into this selfish useless speculation, and put the money to work in other places where it will do some good creating jobs and building the wealth of countries and their citizens.

Posted by mikemm | Report as abusive

THE ASIAN MARKETS ARE HORDING AND MANIPULATING US CURRENCY MARKETS CHINA BEING NUMBER ONE IN THAT REGARD HOPING FOR A DEVALUATION IN MAJOR WESTERN CURRENCIES.

Posted by Humility101 | Report as abusive

If this demented plan goes through at today’s closing price, U of Texas will be taking delivery of approximately 22.8 tons of .9995 pure gold, a cubic meter of soft yellow metal. What do the trustees imagine they are going to do with their massively useless, totally immovable ingot of shame?

Probably they will decide to melt and coin it into 666,666 eagle-stamped American Krugerrands (seriously, do the math). John Ashcroft, in celebration, will then lend his best avian screech to a final chorus of “Let the Eagle Soar, Like It’s Never Soared Before.”

In this fever dream, Texas keeps on paying football players and department heads, passing out swarms of buttery gold coins to grateful loyalists, just as if the Great Crash of 2012 had never taken place. The drama unfolds on an Alamo-themed dystopian future campus, defended by a nest of patriotic snipers perched atop UT’s famously lethal clock tower.

Without question, one of the stupidest ideas I have ever heard.

Posted by Ralphooo | Report as abusive

Why all the wailing in the comments section over 5% of the endowments assets? It’s a hedge, and given the bias of the Federal Reserve and Treasury for money creation (stimulus and especially “quanitative easing”) who can blame those Texans for doing a little hedging?

In the meantime I see no comments on James’ observation regarding purchasing stocks. Bravo for that one Mr. Saft.

Does anyone ever consider what happens when our Federal Reserve is forced to abandon it’s ZIRP (zero interest rate policy)? How do we measure and service our debt when rates rise as they must?

When QE ends, THEN Ralphooo, then we might see some people ascend that clock tower. Thanks for mentioning that. You reminded me of a classic obscure song written by the late Harry Chapin.

MIA

Posted by Missinginaction | Report as abusive

Gold is the anti-fiat currency, but not the anti-investment. It is the ultimate commodity investment. Does anyone think that high oil, grain and meat prices are just a blip? Please consider the macro view: rising world population, rising middle classes in developing countries, climate change, dwindling resources, declining real wages in developed countries.

Many countries are actually borrowing money (or printing it) just to subsidize commodity prices for their hungry masses. Money supply, asset prices and debt have skyrocketed worldwide since 1971, when the world abandoned the gold standard.

Gold is etched in the human psyche by ages of evolution. It doesn’t spoil or even corrode. It’s fungible and easy to store. It is as precious and beautiful as fine art, but indestructible.

Posted by DMon707 | Report as abusive

The diversion of investment funds into gold is just one instance of malinvestment, but it isn’t an “anti-investment” in any destructive or sociopathic sense as Mr. Saft seems to imply.

When the Federal Reserve lowers interest rates below the natural rate of interest, then that puts in motion a broad distortion in the allocation of capital. Under such inflationary conditions it becomes prudent to make malinvestments, not as a way of profiting, but simply as a way of losing less relative to other options available.

Another example of malinvestment is the diversion of investment money into the building up of excess inventories as a hedge against rising prices. Or buying houses for resale during a credit expansion boom.

The long term solution to the whole problem of malinvestment is the remonetization of gold.

Gold, then, is a profoundly optimistic and inspiring investment.

Posted by Tim1776 | Report as abusive

Stocks and gold are not necessarily opposed as investments, nor is one intrinsically a malinvestment while the other isn’t. For example, buying gold mining stocks is a simultaneously an investment in stocks and gold.

Stocks can be a malinvestment if purchased as a hedge against inflation, the reasoning being that even if a fiat currency were to become worthless, then at least the physical assets of a corporation would retain some of their value. This is true, stocks do perform better than fiat currency under inflationary conditions. For example, during the hyperinflationary period of the 1920′s, the German stock market only lost 80% of its value relative to gold.

So, if you’re going to make a malinvestment while waiting for the government to stop monkeying around with the economy, then it’s worth noting that some types of malinvestment are less bad than others.

Posted by Tim1776 | Report as abusive

I agree with the idea of putting savings into real assets. Too bad some of these funds are so big they cannot buy into the pro-investment investments unless there is a dark pool for them to hide in. For the rest of us, there are still plenty of opportunities for sure.

Posted by threeRivers | Report as abusive

Gov. Perry has been hinting at secession for a while. There’s no secret that he wants no part of Washington’s dictates on pollution and food safety, nor healthcare, nor the impact of national debt on the fortunes of Houston’s oil barons. Perhaps the University is preparing in case the state makes good on the governor’s musings.

Posted by SanPa | Report as abusive

Gold over the long term is a very bad investment. It is only good during times of inflation. All of the money being put into gold would be better served in real estate where the prices are very low and over the long term will once again rise. A house or land is a better asset than gold in my opinion. If they are worried about anarchy why not buy millions of gallons of water and dry foods instead?

Posted by Trooth | Report as abusive

Physical gold is insurance against corrupt organizations, both Governmental and Business. All it takes to be robbed is for the investor to trust in Government keeping its promises and being certain that private individuals do too.

Unfortunately, Government not only lets private organizations defraud stakeholders, it helps itself to earned wealth through fraudulent money and equally fraudulent capital gains taxes. All it takes is a single corrupt individual to destroy a lifetime’s savings. And America seems to have more crooked powerful people than honest ones. And it puts no value on keeping its word, at least its own people.

Posted by txgadfly | Report as abusive

Thanks , I have recently been looking for info about this topic for a long time and yours is the greatest I’ve found out so far. However, what about the conclusion? Are you positive in regards to the supply?