University investment in gold has huge payoffs

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Gold and green may not be UT’s colors, but the University may be seeing more of both.

Beginning in September 2009, the University of Texas Investment Management Company spent $767 million over 19 months on gold bullion, which is now worth almost $1 billion, said Bruce Zimmerman, the nonprofit investment corporation’s president. Gold reached an all-time high price of almost $1,490 an ounce this month.

The $767 million came from the Permanent University Fund endowment which UTIMCO manages on behalf of the University of Texas and Texas A&M systems. Zimmerman said the corporation manages a portfolio worth $25 billion. The endowment is made up of profits from leases on much of the 2.1 million acres of Texas land set aside to fund a public university.

With almost 19 metric tons of gold, UTIMCO would rank 55th in the world among countries’ gold reserves, behind Morocco, which has 22 metric tons. The U.S. has the largest reserves with 8,133 metric tons.

The UT System receives two thirds of returns on UTIMCO’s investments of the endowment and the A&M System receives one third. UT-Austin received almost $167 million during the 2010-11 fiscal year from the endowment, which has made up 7 to 9 percent of the University’s total budget over the past decade.
Zimmerman said the gold investment is a protection against the rest of the corporation’s investments in stocks and bonds.

“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,” Zimmerman said.

He said while monetary policies could impact inflation, the value of gold will vary independently.
“Historically, gold has behaved as, and been believed to be, an index against which currencies are measured,” Zimmerman said.

Kyle Bass, a UTIMCO board of directors member and managing partner of Hayman Capital Management in Dallas, successfully hedged against the subprime mortgage collapse in 2008 and helped with the investment.

“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?” Bass said in an interview with Bloomberg, a financial information service. “I look at gold as just another currency that they can’t print any more of.”

Senior finance lecturer Sandy Leeds said since only about 5 percent of UTIMCO’s investments are in gold, they would probably be happier if the gold investments don’t do as well and rest of their portfolio remains strong.

He said with high inflation around the world and increasing domestic uncertainty illustrated by the recent struggle over cutting a small portion of the federal budget, investing in gold separates the company’s portfolio from some volatility.

“The financial logic behind investing in gold is it’s considered to be an asset not correlated with many of the other assets UTIMCO holds, like stocks and bonds,” Leeds said.

He also said the recent negative outlook Standard & Poor’s gave the U.S. credit rating shows some of the economic uncertainty, which could drive interest in gold.

He said the negative outlook means the U.S. will likely drop from its current “triple A” rating, which is the highest rating given by Standard & Poor’s.