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Gold-Shortage Threat Drives Texas Schools Hoarding 664,000 Ounces at HSBC

Dallas hedge-fund manager J. Kyle Bass helped advise the University of Texas Investment Management Co. on taking delivery of 6,643 gold bars, worth $991.7 million yesterday, that are stored in a bank warehouse in New York.

Bass, who made $500 million with 2006 bets on a U.S. subprime-mortgage market collapse, said managers of the endowment, known as UTIMCO, sought board approval to convert its gold investments into bullion this year. A board member, Bass, 41, said he was asked to help with that process.

While Bass, a managing partner at Hayman Capital Management LP, said in an April 16 e-mail that “the decision to purchase and take delivery of the physical gold” was made by endowment staff members, “I helped where I could.” Gold futures touched a record $1,498.60 an ounce today in New York before settling at $1,492.90.

The Texas fund’s $19.9 billion in assets ranked it behind only Harvard University’s endowment as of August, according to the National Association of College and University Business Officers. Last year, UTIMCO added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The fund’s managers sought to take delivery of bullion to protect against demand for the metal overwhelming supply, according to Bass.

Contracts Exceed Supply

Open interest in gold futures and options traded on the Comex typically exceeds supplies held in its warehouses. If the holders of just 5 percent of those contracts opted to take delivery of the metal, there wouldn’t be enough to cover the demand, Bass said.

“If you own a paper contract where they can only deliver you 10 cents on the dollar or less, you should probably convert it to physical,” said Bass, who isn’t related to Fort Worth’s billionaire Bass family. He said holding cash wasn’t a better choice because the rate of inflation exceeds money-market rates by 2.5 percent to 3 percent, eroding the value of cash.

“The call to take delivery is more of a challenge to the system and it borders on the anarchistic,” said Ralph Preston, a principal at Heritage West Financial Inc., a San Diego company that specializes in futures trading. “It’s like the Republicans trying to overturn President Obama over the birth certificate issue. It’s poor sportsmanship.”

Storage Costs

Bullion banks generally charge his clients about $15 a month to store a 100-ounce bar of gold, the amount covered by a single contract, Preston said. The Texas fund negotiated with Comex to pay about 0.1 percent of the metal’s value, Bass said.

That would indicate an annual cost of about $992,000 to store the delivered gold, based on today’s price. By comparison, the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, charges a management fee of 0.4 percent of invested assets. That would reach almost $4 million for the Texas fund.

Sovereign-debt concerns also boosted demand for the metal today, driving Comex futures to an all-time high as Standard & Poor’s revised its U.S. credit outlook to negative. The price has climbed 31 percent in the past year.

“Why hold your money in dollars when the Fed can double and triple the supply rather quickly and quietly and won’t even tell us what they are doing,” U.S. Representative Ron Paul, a Texas Republican who has for decades favored a return to a currency backed by precious metals, said today in a telephone interview. “Logic tells me a lot more people will do it.”

10-Year Rally

Gold’s 10-year rally has attracted billionaire investors such as George Soros and John Paulson, who seek a store of value as record-low interest rates erode returns on currencies.

“You’re starting to see institutional investors accepting gold and commodities as legitimate investible assets and taking physical control of them,” said Michael Cuggino, who helps manage about $12 billion at the Permanent Portfolio Funds in San Francisco. About 20 percent of the fund is in gold stored in Comex warehouses.

“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 April 15 in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

Few investors take physical delivery of bullion. As of April 14, 2,860 contracts this month, about 0.5 percent of total open interest, had been converted to metal, exchange data show.

Slowing Deliveries

Physical deliveries have slowed as gold topped records this year, said Blake Robben, a senior market strategist who handles deliveries of Comex metals for clients at Chicago-based broker Lind-Waldock.

“It’s usually wealthy individuals with net worth over $1 million who want to take delivery to diversify away from the dollar,” Robben said. “Generally, it’s a big hassle and not worth it to take delivery.”

Investors should be wary of government attempts to curtail holding gold, Paul said, citing U.S. ownership restrictions in the 1930s. “Governments don’t like to be embarrassed.”

To own 100 ounces of gold futures with Lind-Waldock, investors pay a $100 fee and put up $6,571 in a margin account to buy a single contract. To take delivery of a 100-ounce bar, investors have to pay the contract’s full price.

Bass, a Texas Christian University graduate who was named to the endowment’s board in August, is a former salesman with Bear Stearns Cos. and Legg Mason Inc. He said about 5 percent of his hedge fund is invested in gold.

The endowment, which oversees funds held by the University of Texas System and Texas A&M University, has 664,300 ounces of bullion in a Comex-registered vault in New York owned by HSBC Holdings Plc (HSBA), the London-based bank, according to a report distributed at a meeting in Austin last week. The fund said its cost basis for the gold investment was $764 million.

“I simply voted as a board member to approve the storage facility and concurred with their decisions,” Bass said.

To contact the reporters on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net. Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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