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Texas Gold Depository

Written by Geoffrey Pike
Posted June 12, 2015

You can always count on some interesting legislative proposals to come out of California, but more often than not, these are in favor of expanding government.

On the other hand, you occasionally get some interesting legislative proposals coming out of other states that are more liberty-oriented.

In the case of Texas, the legislature there just recently passed a bill that would establish a state-run gold bullion depository — a state-level Fort Knox.

With an overwhelming vote of 140 to 4 in the Texas House, it looks as though this will become a law. The governor has until June 21 to issue a veto, and the legislation would automatically pass if the governor does nothing. 

This would establish a facility called the Texas Bullion Depository — basically a giant safety deposit box for gold bullion. Texas would become the first state-level government to have such a thing.

In Texas, there are two big public pension funds that own more than $1 billion worth of gold. One is the Teacher Retirement System, and the other is the University of Texas, which made headlines in 2011 when the pension fund board made the decision to take delivery of the gold bars it owns. The gold is now warehoused in New York with HSBC Bank.

As one of the board members pointed out, there is much more financial gold out in the market than actual physical gold. So the board felt it was appropriate, in upholding its fiduciary duties, to take possession of the gold to ensure greater safety of the pension assets. 

Liberty and States’ Rights 

As an advocate of liberty and free markets, I am somewhat mixed about this legislation that is likely to become law.

On the one hand, this is a celebration of states’ rights and decentralization. It is sending a message to Washington, D.C. that the bureaucrats there do not have unlimited control and rule.

On the other hand, the Texas state government is still a government, and a big one at that. The people of the state tend to be more oriented towards liberty than much of the rest of the country, so this tends to keep the government there more in check. But the Texas state government is still filled with politicians who are more than happy to wield power over others. They just can’t typically get away with as much.

It is a positive sign that people there are distrusting of the federal government. They are also distrusting of the big banks, which typically offer safety deposit boxes. But we know the big banks are generally under the thumb of the Federal Reserve and the federal government.

If there is a market demand for gold storage, why don’t we see an entrepreneur step in and offer gold storage facilities? In this case, they don’t have to just be for gold.

Of course, there are such facilities that exist, and many of them will even buy your gold for you and store it. You don’t have to take direct possession of it unless you want to.

It is not quite clear in the case of the Texas depository who will be using it. Will it just be big institutions such as the University of Texas? Will small-time investors be able to store their gold there? 

If you are an individual gold investor, I would not recommend that you turn your gold over to the Texas state government. Again, it is better than Washington, D.C., but it is still a state power.

To be fair, there is a provision in the legislation that specifically addresses the threat of gold confiscation, as in reference to the 1933 confiscation issued by Franklin Roosevelt.

Perhaps the most interesting part of the legislation is that it purports to allow people to use gold as a form of money, as the U.S. Constitution states. Supposedly it will allow accounts to easily transfer certain amounts back and forth so that parties can make legal contracts in terms of gold pricing.

While I don’t think you should trust the institution enough to turn over your gold to the Texas state government, this legislation is overall a positive thing because it affirms states’ rights and puts Washington, D.C. on notice.

Scaring the Feds

This legislation, especially coming from a big state like Texas, has to scare the federal government and the central bankers at the Federal Reserve.

The Fed and the federal government depend on the fiat monetary system to spend money, bail out banks, run up debt, and quietly tax people in the form of debasing their money.

Legislation such as this is a threat to the establishment. It sends a strong message that they better not think about trying to confiscate gold, as has been done in the past.

It also sends a strong message that more people are willing to protect themselves with gold against our world of monetary inflation. And if the Fed gets too carried away with its digital money printing, then Texas will already have some kind of system to work off of in terms of not using the dollar.

I’m not saying it will come to this, but it is symbolic in retaining some liberty, similar to gun ownership in this country. It is not something that will likely be used against a tyrannical government because the symbolism itself keeps tyranny in check.

It will also be interesting to see if other states decide to follow suit on this type of legislation. In 2011, the state of Utah passed legislation affirming the acceptance of gold and silver as legal tender, so this Texas legislation is not coming out of nowhere. 

State governments are pushing back on more and more issues, including the use of gold and silver as legal tender. 

Investment Implications

For investors, the most interesting part of this story is the fact that more investors, including major pension funds, are looking to actually hold physical gold in their possession.

More and more people are losing trust in the financial system. We don’t know if the Fed actually has the gold in its possession that it says it does. But we also don’t know about many funds that claim to hold gold.

Most people trading futures and option contracts do not actually take delivery of their gold. Of course, this is true of most commodities traded in the futures market. But it becomes a concern when the paper markets are so massive as compared to the overall transactions in the physical market.

In the case of gold, what happens if more investors start demanding possession, similar to what was done by the pension fund board for the University of Texas?

As investors lose trust in the paper markets and seek to get their hands on physical gold and other assets, prices are going to reflect this demand. The Fed can tell Goldman Sachs or some other big player to short the paper market in gold, but it is going to unravel quickly if demand for the physical metal increases.

Ultimately, the demand for the physical metal is going to control the market. The paper market has to follow at some point. This can mean greater dollar profits when investing in gold, regardless of whether you own it physically or through the financial markets.

As people lose trust in the Fed and in the financial markets that the Fed blows up, there will be more physical demand for gold. Gold investors will benefit regardless of whether they have their gold in a Texas depository or buried in their backyard.

This Texas legislation may or may not be a good idea overall, but it is a sign of the building distrust in our financial system. Some people do not want to be caught off guard again as they were in 2008.

Until next time,

Geoffrey Pike for Wealth Daily

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