Triumph of gold, the anti-investment
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.
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: email@example.com)