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Texas takes its gold

On June 12, Texas Governor Greg Abbott signed legislation to establish a state-run gold depository in the Lone Star State. In a statement, Abbot said, “The Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state.”

On June 12, legislation was signed authorizing a Texas Bullion Depository.

On June 12, legislation was signed authorizing a Texas Bullion Depository.

A further statement from his office stated that the state, “Soon, will repatriate $1 billion of gold from the Federal Reserve Bank to Texas.”

This second statement is almost certainly incorrect. The University of Texas owns 6,643 100-ounce gold bars in its endowment fund, purchased four years ago at a cost of $764 million. Most are stored in a basement vault at the New York City headquarters of the bank HSBC.  The endowment is paying HSBC about $1 million in fees annually for storage costs.  At current prices, the endowment fund is only slightly ahead of its cost basis (ignoring changes in consumer prices).

If the University of Texas moved its gold bars from storage in HSBC and elsewhere, none would come out of the Federal Reserve Bank of New York’s vaults.

Use of this depository will be open to any government agencies in Texas, and to businesses and individuals.

Generally, when governments perform a service that is also provided by the private sector, it is unable to be as cost-efficient as the private competitors. Unless the private businesses are burdened with government regulations, or the government is receiving taxpayer-funded subsidies, government-sponsored entities are unlikely to match the lower prices charged by their competitors. I expect the same problem will apply to the Texas state gold depository.

Beyond the prospect that the state-run operation will not be as cost efficient as the private competition, I also see another huge potential drawback to using a gold depository owned by the Texas state government. Governments at any level have the ability to change laws that could restrict the ability to redeem privately held gold that is stored at the depository.  A private depository does not have a similar risk.

Even though I would not recommend storing physical gold at the Texas state gold depository, there are two intriguing features for this operation that I find extremely attractive.

First, the law creating the depository explicitly declares that no “governmental or quasi-governmental authority other than an authority of [Texas]” can confiscate or freeze any party’s gold stored inside this entity.  The use of this language is specifically directed at any attempt by the Federal Reserve to try to gain control of physical gold stored there. By including such language in the legislation, the state of Texas is effectively making a statement that the U.S. dollar’s future outlook is, at best, shaky. I strongly concur with this fear of the U.S. dollar declining sharply in value or even failing in the not-too-distant future. Therefore, I think establishing this depository outside of the control of the federal government is a wonderful idea.

Even more interesting to me is another provision in the legislation. The depository’s planned operation will eventually allow owners of gold stored there to transfer ownership without the need to withdraw the physical gold. Effectively this could lead to a form of money circulating in the U.S. in competition with the U.S. dollar.  Instead of paying for a purchase in dollars, the buyer could transfer a certain quantity of gold stored at the depository.

How will the establishment of the Texas state gold depository impact gold prices? I think it will have only a minimal direct positive effect, as it will encourage a few more people to acquire physical gold. Having said that, though, the impact could grow a lot if other states follow suit. The legislation creating this depository explicitly acknowledges that the U.S. dollar is not a rock-solid store of value and that the Federal Reserve is not necessarily to be trusted. Any action that shakes the public confidence in the dollar, the Federal Reserve, or the U.S. government will result in more people seeking the safe haven of owning physical gold (and silver).  Any increase in demand with currently declining supplies is bound to result in significant price hikes.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner.  He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns).His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).  

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