Texas Wants Its Gold Back (Mar 2013)


Source: Washington Post – Texas wants its gold back! Wait, what?

Notable excerpts:

Perry and some in the Texas legislature want to bring the roughly $1 billion worth gold held by the state university system’s investment fund onto Texas soil, rather than in its current resting pace in a vault in New York.

“If we own it,” Perry said on Glenn Beck’s radio show last week, according to the Texas Tribune. “I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.”

Here’s the thing. Perry’s push to relocate the state’s gold to a newly created “Texas Bullion Depository,” in a strange way makes perfect sense. It lays bare the rationale for investing in the yellow metal to begin with, and is an excellent illustration of the strange role that gold plays in a modern economy and investors’ psyches.Some basics: People speak of gold as an “investment,” but that’s not quite right. When you buy shares of a company’s stock , you are buying a claim to the future profits of that company. When you buy a Treasury bond, the U.S. government is pledging to pay you a certain amount of money on a certain schedule in the future. But when you buy a 1 ounce ingot of gold, no matter how long you will hold it, you still have exactly one ounce of gold.In fact, if anything, gold has a negative yield. Because you have to store that gold somewhere; if you keep it in your house, there is a risk of theft. If you keep it in a safe deposit box at the bank, you will have some fee.

If Texas moves its gold back home, it will deal with this in a very real way: Whatever it costs to build, maintain, and guard a facility secure enough to stash $1 billion of gold in will essentially subtract from whatever investment return the holdings offer.

Texas media outlets have reported that the state’s gold is held at the Federal Reserve Bank of New York, though it appears the gold in question is actually at the vault of a private bank, HSBC, in New York.

The most common reason to buy gold is as something of an insurance policy against some very bad events, like a bout of significant inflation. In the more plausible scenarios, like a return of 1970s-style period of 10 percent or so annual price increases, gold would indeed likely prove to be quite a good investment. But in that scenario, the state of Texas would have no problem getting access to its gold stored in New York. There would be no need to go to the trouble and expense of setting up a miniature Fort Knox in Austin.

For it to make sense to go to all that hassle of storing your own gold, you have to be insuring against some much darker possibilities, like a collapse of the U.S. government and monetary system, and/or Texas making a (second) bid to secede from the United States.

In some episode of hyperinflation and U.S. government collapse, as the nation falls into a Hobbesian state of nature,  paper dollars will be no good, and gold would likely be the medium of exchange for buying food and guns and whatever else is needed for Texas to prosper amid the post-apocalyptic hellscape.

Similarly, if Texas were to decide that enough was enough and it wished to no longer be part of these United States (a notion that Perry himself seemed to joke about in 2009, saying “When we came in the union in 1845, one of the issues was that we would be able to leave if we decided to do that.”), one could imagine the desirability of having its gold supply close to home.  That would put New York banks, regulated by the U.S. government, in the position of having to determine whether the rebel republic of Texas was the rightful owner of the gold in its vault. In that scenario, it’s easy to imagine Texas would have a hard time getting ahold of its gold.

In other words, if you think you need to hold gold as a hedge against a total collapse of the U.S. monetary and political system collapsing–not just as a hedge against higher-than-expected inflation–you had best store it close to home.

Texas, it is worth noting, is not the only large, prosperous economy with a hard-money  mentality to look to keep its gold close to home. Earlier this year, Germany’s central bank said it will relocate billions worth of gold from vaults beneath the New York Fed and French central bank, guarding them in Frankfurt rather than entrusting them to central banks elsewhere.

So there you have it: Texas, the Germany of America.


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