Endowment Funds Looking for Golden Hedge

By Dave Brown – Exclusive to Gold Investing News

A recent Business Insider article discussed the prospect that large institutional investors, including pension funds and endowments, have a predisposition for following trend behaviour.  The thesis was based on the premise that fund managers are ultimately risk managers and allocate capital as much with the objective of mitigating downside volatility as with protecting the principal.  Investors might note that if this proves to be accurate the case remains quite compelling for a continued strengthening of gold prices well above the current trading range.

Sovereign wealth funds and central banks

In the past few years, China, steward of the third largest Sovereign Wealth Fund, has shown a strong appetite for gold and resource based investments.  The Reserve Bank of India has also exhibited pressure on spot market prices by adding to its impressive bullion holdings.

Lone star state

Bloomberg reported in April, the University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion.  The endowment, which oversees funds held by the University of Texas System and Texas A&M University, has 6,643 bars of bullion, or 664,300 ounces, in a Comex-registered vault in New York owned by HSBC.

Largest endowments bullish on resources

Although the most recent report for Harvard does not contain full financial disclosure, the largest endowment fund in the United States also demonstrates a similar bullish outlook for resource investors, “We believe natural resources is a core strength in our portfolio, offering inflation protection, cash flow and long-term growth. At (Harvard Management Company) HMC we are well-equipped to recognize and negotiate good value in the natural resources arena, with an experienced in-house team, strong relationships with local operating partners around the world, and a track record of over a decade of transactions. The long-term return on our natural resources portfolio since inception is 13.3 percent annually.”

A recent White Paper by Barclays Wealth, ‘Investment management for endowments and foundations; balancing impact and longevity’, indicates that there are no simple solutions for foundations and endowments looking to support their distribution policy (the proportion of total assets they choose to give away each year) and continue doing so for a long time. Faced with the possibility of a prolonged period of low investments returns, the paper advises that leaders of foundations and endowments will need to assess their overall investment strategy and articulate contingency plans.  As a result many institutions may be following the Texas and Harvard examples as a necessity to hedge the overall risk profile and generate increased exposure to precious metals, including gold silver, platinum and palladium.

Unlocking potential

With private foundations in the United States managing approximately $600 billion at the end of last year, the potential to significantly move the market and strengthen gold spot market prices is considerable.  If the US university endowments were to augment their gold positions from present ranges of 1 percent to an average of 5 percent of their portfolios, it would equal $20 billion. As noted by Peter Schiff, president and Chief Global Strategist for Euro Pacific Capital, “this is significantly more than the entire yearly gold production of China, the world’s largest producer.”

As Schiff points out the capital pool of liquidity around the world that is available for investment is relatively large compared with the current size of the gold market. Gold remains widely neglected among institutional investors, but it is apparent that they are adjusting their investment theses and strategies in order to minimize exposure to currency risk and debt contagion. The potential for gold investors and industry stake holders may be as much a matter of “time in” the market as opposed to “timing” the market.