Texas Wants Its Gold Back, but to What End?

(April 3, 2013 - by Louis Golino for CoinWeek)

At first blush Texas might not seem to share much in common with Germany.

But in addition to being the largest states in their respective unions, Texas, like Germany, now wants to take physical possession of its physical gold reserves stored outside the state.

A few years back the Texas university system made headlines by making huge investments in gold, not shares in gold-backed ETF’s or mining companies, but actual gold, a billion dollars worth of it, in fact.

That gold, which is under the ownership of the Texas Investment Management Company, is currently stored in New York.  While many people believe that like Germany, Texas’ gold is held below the New York Federal Reserve Bank, in reality the gold is stored with a private bank, HSBC, one of the largest banks in the world.

Last week Texas Governor Rick Perry, a former presidential candidate who famously threated bodily harm against the Chairman of the Federal Reserve during the 2012 GOP primary because of Mr. Bernanke’s quantitative easing policy, made headlines again last week by saying Texas no longer wanted to store its gold in New York.  He made the call during a Glen Beck radio show.

Gov. Perry said that Texas would pay to have all that gold transported back to Texas and would build a kind of mini Fort Knox to store it.

Neil Irwin of the Washington Post wrote on March 27 that Gov. Perry’s move only made sense if Texas either expects the U.S. national government to collapse, or if it plans to make good on threats to secede from the union, a frequent theme evoked by Gov. Perry.

Mr. Irwin also pointed out that in his view gold is not an investment.  It is more of an insurance policy against bad events.  Moreover, if you consider storage costs, especially on the scale involved in this case, gold is not only an investment that pays no yield.  It actually has a negative yield, in Mr. Irwin’s views.

But that view overlooks changes in the valuation of gold, which over long periods of time has held its own in purchasing power terms.  Moreover, it has no counterparty risks.  It is really an asset, in my view, more than an investment.

Mr. Irwin explains that gold is a good thing to buy if you believe the U.S. is headed for another era of hyperinflation like that of the 1970’s.  But again, that overlooks the fact that it remains the best-performing asset class of the past two decades when inflation remained very low.

In the case of Germany’s well-publicized call to have its gold reserves stored overseas in France and the United States returned to Germany, there had been questions about whether the gold is really all there, so an accounting was requested.  And as domestic pressure grew in Germany for returning the gold, the German government made plans to bring it back over a period of time, a major logistical undertaking given the size of Germany’s gold reserves.

The original rationale for storing the gold overseas, which was protecting it from nuclear annihilation in the event of war in the middle of Europe, had disappeared, and there appeared to be no logical reason to store all that German gold overseas.

But in Texas’ case the rationale for returning it back home is a lot less clear.

According to the Week (www.theweek.com) former Rep. Ron Paul, a proponent of the gold standard, supports Gov. Perry’s move, but Giovanni Capriglione, a Texas state legislator who wrote the legislation calling for the repatriation of the gold, said the move has nothing to do with Texas going back to the gold standard.  Instead, in his view, it is intended “give the state a reputation as being more financially secure in the event of a national or international financial crisis.”

But unless Texas really plans to secede from the union, or expects the national government and financial system to collapse, in which case it might make sense to take its gold back and build the high-security depository to store it, there does not appear to be good justification for this move, and there is little support for it in the Texas state legislature.

As Mr. Irwin pointed out, in most crises (short of a systemic collapse) it would be easier to sell the gold if it remained in New York, where it would be close to the precious metal exchanges and financial institutions that would be involved in such transactions.

The whole issue does draw attention to the question of where and how gold owners should store their physical gold.

Everyone has different requirements.  Many very wealthy people who own large amounts of the yellow metal cannot simply rent a bunch of safety deposit boxes, or build a secure in-home vault, because of the size of their holdings.  Besides, some of them remain concerned that a 1933-type of situation could repeat itself, and that their gold could be confiscated, so they prefer to store it overseas at locations such as the secure allocated storage facilities of the Perth Mint in Western Australia.

But states are not individuals, and it is hard to see the real benefit to moving all that gold from New York to Texas