Posted April 27, 2011 at 1:52 am
by David Mildenberg and Pham-Duy Nguyen
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.”
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….