Friday, May 6, 2011

Peter Schiff Says The Herd Is Turning...Towards Gold

The herd in question is composed of major institutional investors. For most of gold's 10-year bull market, they ignored the metal. But recently, daring institutional buyers like the University of Texas' endowment funds have been putting some funds into gold as a portfolio hedge. The board member who convinced them to do so was Kyle Bass, the Hayman Capital hedge fund manager.
The purchase is certainly causing a few heads to turn.

Now that a major endowment has taken this step, other fund managers are going to be emboldened to follow through on their gut instincts. These are smart guys, after all; they are aware that although their funds may be posting nominal gains, they are losing much more in purchasing power. I’m sure many have privately bought precious metals, but now they have cover to do so professionally....

As endowment after endowment decides to sell billions of Bernanke’s dollars and diversify into gold, what might this do to the gold price? If these colossal funds start getting the idea that holding 5% of their portfolio in gold is more conservative and intelligent than holding the current average of 1%, what will this mean for gold demand? The answer is obvious and the ramifications huge.
What makes for those huge ramifications is the fact that there's a lot of institutional money relative to the supply of gold. If all private foundations followed the University of Texas' lead and put 5% of their portfolios in gold, they'd have to buy about 400 tonnes of the metal to make good.

Schiff concludes by saying that the smart money is waking up and about to veer towards gold.

I can't really fault him on his logic, as what he says gibes with what I know about institutuonal investors. They do often act like a herd when one of their own takes a daring risk that pays off hugely, although there's often a lag time. Should they pile into gold, the metal might well go parabolic...making them all look very smart.

For a time, anyway.

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