Did Yale miss a golden opportunity?

David Swensen is an "expert in fine beer" in this photo.
David Swensen is an "expert in fine beer" in this photo. Photo by Alison Griswold.

The price of gold has skyrocketed amidst continued economic uncertainty, and at least one university endowment is reaping the benefits.

The University of Texas Investment Management Co. revealed in April that it had invested nearly $1 billion in gold — an asset that tends to swell in price during periods of economic turbulence because many consider it to have relatively dependable value. This was certainly the case this summer, as the price of gold soared by hundreds of dollars per ounce amid global economic uncertainty, including the European sovereign debt crisis and Standard & Poor’s downgrade of the United States’ credit rating from AAA to AA+. But though the price of gold has shot up, experts are still divided on whether gold is a worthwhile investment for university endowments, and University President Richard Levin said investing in gold is a choice Yale would be unlikely to make.

“It’s a completely speculative investment,” Levin said Wednesday. “It’s not the sort of thing we would do.”

Roger Kaufman, a professor of economics at Smith College, said that the current stressful economic climate has validated the UT Investment Management Co. decision to invest roughly 5 percent of its portfolio in gold, at least for the moment. Gold was valued at more than $1,860 per ounce as of Thursday afternoon.

That price is significantly higher than the $1,486 per ounce mark that gold hit in mid-April, at which point the UT Investment Management Co., which manages funds for the University of Texas System and Texas A&M University, had already surpassed Yale as the second-largest U.S. higher education endowment at $19.9 billion, according to an April 16 report by Bloomberg. Yale’s endowment was valued at $16.7 billion as of June 30, 2010.

Still, Kaufman said the value of gold typically reflects the public’s fears about currency and the economy, and therefore, those who invest in gold must worry that its price will fall if a period of economic uncertainty is resolved.

Levin said he thinks investing in gold is a risky bet, noting that gold prices are largely determined by “purely speculative and psychological” factors.

“We could decide we’re going to place $1,000 on red on a roulette wheel on Foxwood’s,” Levin quipped.

Though the University does not disclose its investments, Levin said he does not think that Yale has any money in gold or gold-related stocks and commodities.

Putting the endowment into gold also goes against many tenets of the University’s investment philosophy. Yale has become known in the investing world for a diversified strategy — often referred to as the Yale Model — that was pioneered by Chief Investment Officer David Swensen GRD ’80. His tactics place a premium on illiquid assets such as real estate, oil, timber and gas, while also maintaining a long term view on those that can more readily be converted into cash.

Swenson’s strategy helped Yale’s endowment post returns in the double digits in the years between 2004 and 2007, but made it challenging for Yale to ride out the 2008 recession when the endowment dropped nearly 25 percent in fiscal year 2009. Swensen did not return a request for comment for this story.

Yale’s preferred commodity investments, also called “real” assets, are ones that generate flows of income after the initial investment; for example, a tract of land may produce property rent and a forest may yield timber purchases. Holding gold in a vault, however, does not produce comparable streams of income, known as “current cash yields.”

Gold also does not generate interest and lacks “intrinsic value” because it has no inherent use, making it an uncommon holding for large endowments, said John Griswold, executive director of the Commonfund Institute, a Wilton, Conn.-based investment firm.

“Unlike a bond or a stock, it doesn’t pay a dividend or an interest rate or coupon,” Griswold said. “It only appreciates in times of uncertainty or stress. It’s considered by many people to be a store of value in stressful times.”

Harvard’s endowment remains America’s largest academic endowment, valued at $27.6 billion as of June 30, 2010.

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