Texas University Takes Cue From Kyle Bass to Hold $1 Billion in Gold Bars

http://www.bloomberg.com/news/2011-04-16/texas-university-takes-cue-from-kyle-bass-to-hold-1-billion-in-gold-bars.html

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

I blogged about this last week, but wanted to reiterate that the University of Texas Endowment fund took delivery on $1 billion of physical gold bullion--not an ETF, for reasons I've blogged about many times.  Use the Search function in this blog and enter "GLD" and "SLV" on why it makes sense to avoid those precious metals-based ETF's for gold and silver, respectively.

In a nutshell, those ETF's are good proxies for spot prices of gold and silver UNDER NORMAL MARKET CONDITIONS.  But under distressed conditions, or in the case of a default in the physical markets (i.e. the custodians don't have enough physical inventory to meet their obligations), the physical spot prices will decouple from the ETF prices.  In other words, owning GLD and SLV are merely paper claims to precious metals that may or may not exist in the custodian vaults.  In the case of a shortage, the spot price may soar, while holders of GLD and SLV will be left with owning empty claims.  There's nothing worse than betting in the right direction, and still losing everything.

This is the reason why Kyle Bass advised the University of Texas endowment fund to take physical delivery of their gold bullion, removing counterparty risk.  But there is one detail they did not account for.  Since HSBC is now the custodian for the endowment fund's gold (with serial numbers of gold bars on every certificate), HSBC becomes the counterparty risk, as bullion banks have been rumored and even prosecuted for charging storage fees to clients even though their clients' inventory is no longer in their vaults.  In other words, their clients' gold had been swapped, sold, or leased out--without knowledge and consent from the client!  I'm not suggesting HSBC has been guilty of this in the past, but it has happened.  <click here>

In June of 2007, Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when in fact it was alleged that Morgan Stanley wasn't physically storing their gold and silver at all. NIA believes we may now have an epidemic of banks selling gold/silver they don't have. If this isn't exposed immediately, it could bring down the world's financial system.

See disclaimers in the side bar.

Disclosure:  long precious metals shares, no position in GLD, no position in SLV.