Gold's slump has saddled the second-largest U.S. college endowment with more than $300 million in paper losses. But the swoon hasn't shaken the faith of Bruce Zimmerman, who since 2007 has been chief executive of University of Texas Investment Management Co.
Lately, investors have been dumping gold anew, citing limp inflation, a raging stock market and a reduced need for a safe-harbor investment. Gold prices fell Tuesday, their eighth decline in the past nine sessions.
But Utimco is holding tight to its stash of the metal and even is thinking about buying a bit more. The fund won't consider exiting from gold until central banks such as the U.S. Federal Reserve tighten the money supply, according to Mr. Zimmerman. He says monetary tightening at some point is necessary to reduce the likelihood of a burst of inflation, an economywide rise in price levels.
Utimco's stance is a sign some big investors still see value in gold, despite its drubbing, and that some of these fans won't easily be shaken in their faith in the metal. These investors may look prescient if Fed policies such as near-zero interest rates and $85 billion a month in bond purchases feed a bout of unhealthy inflation or destabilize markets.
At the same time, gold bulls may have to withstand more hand wringing if the economy continues to improve and stocks keep soaring.
On Tuesday, gold lost $6.50, or 0.5%, to $1,377.80 an ounce. That is off 23% from its high of $1,794.10 an ounce in early October of last year and down 18% this year.
Starting in September 2009, Utimco began "laddering" into its position, slowly buying about $950 million of gold futures in a bid to hedge against a fall in the value of the U.S. dollar, euro and Japanese yen. Later, it moved all of its holdings to gold bullion. Before the futures purchases, Utimco had no gold investments.
For most of the past few years, the move seemed a big winner, as gold raced higher.
Since Texas began investing in gold when prices were lower, and spent a year shifting into the metal, the university is still sitting on gains of about $150 million, or about 17%.
But stocks have been even stronger over that period, suggesting the university would have done much better in equities. The Standard & Poor's 500-stock index is up about 60% since Texas began making its gold investments.
Utimco's returns slightly trailed its benchmark, by 0.09%, over its fiscal year ending Aug. 31, 2012. But the returns have topped its benchmark by an average of 2.2% a year over the past three and five years, the organization says. Mr. Zimmerman has helmed Utimco since 2007.
The recent paper losses on gold are unlikely to have a big impact on the universities. Gold investments amount to about 4% of the management company's portfolio—about the same allocation as venture capital, private real estate and government bonds each represent.
Mr. Zimmerman and Utimco aren't gold bugs who shun other markets. Recently, he shifted some of the organization's gold bullion into an equivalent bet on gold using futures, a move that freed up cash that was plowed into stocks. The endowment has about 30% of its holdings in public equities.
But few other public universities are believed to have placed as much in gold. The Commonfund, which invests for various nonprofit organizations, says just 15% of the 708 endowments it polled last year held any commodities.
"Gold doesn't produce any income or have a yield, and you have to pay to store it, so people are still suspicious of it," said John Griswold, executive director of Commonfund Institute. "It's a fairly tiny group" of endowments that have significant allocations to gold, he said.
In Mr. Zimmerman's view, gold is an investment that likely will benefit if inflation ever picks up, or if financial markets turn unhealthy as investors chase stocks and risky bonds, something generally called "asset inflation," as seen in the U.S. housing bubble.
Such a scenario can hurt the overall economy when it unwinds—an outcome that also might benefit gold. Utimco has taken other steps to protect against a possible rebound in inflation, such as buying real estate and natural resources.
"The basic reason we put on the hedge still exists. You could see interest rates and yields way up, and that would be bad for stocks," Mr. Zimmerman says. "Right now, everyone's dancing, but there really isn't an elegant exit to easy money."
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