On June 12, Texas Governor Greg Abbott signed a law establishing the Texas Bullion Depository.
During the signing ceremony, Abbott said that under the new law Texas would “repatriate $1 billion of gold bullion from the Federal Reserve in New York to Texas.”
Texas is basically telling the Federal Reserve, “We don’t trust you with our gold.” Two large pension funds – the University of Texas Investment Management Co. and the Teacher Retirement System – own much of that bullion.
But the Lone Star State isn’t riding solo on this issue: Germany, Austria, and the Netherlands have also begun to repatriate their gold from the Fed, too.
Paper Covers Rock
Why don’t Texas and its three European amigos trust the Fed?
Look no further than Wall Street and the inflated trading of “paper” gold.
Bud Conrad of Casey Research reported in October 2014 that approximately $360-billion worth of paper gold is traded monthly. But only $279 million of actual physical gold is delivered. That’s a ratio of more than 1,000-to-1.
Texas is concerned that gold stored by the Federal Reserve Bank of New York in Manhattan may eventually be used to satisfy physical claims based on these paper trades. In other words, Texas is concerned it has no clear title to gold it rightfully owns.
Keith Weiner, President of the Gold Standard Institute, concluded that Texas, Germany, Austria, and the Netherlands may end up creditors in counterparty relationships where debtors default – but their claims would be unsecured in a bankruptcy proceeding.
Weiner noted that this is exactly what happened to people who held gold bars with futures broker MF Global, a large commodities and derivatives broker driven to bankruptcy in 2011 due to liquidity problems.
Distrust Runs Deep
Texas’ distrust extends to Wall Street. But it’s focused on politicians in Washington, D.C.
A provision in the bill signed by Abbott would block confiscation of Texas’ gold by the federal government – a clear sign that Texas remembers the 1933 move on bullion by the Roosevelt administration via Executive Order 6102.
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At that time, the government generously paid citizens $20.67 an ounce for their gold. Then FDR’s regime devalued the U.S. dollar by 40%, revaluing gold at $35 an ounce.
The Texas bill also opens the door to establishing gold and silver as money, completely bypassing the Fed and its Federal Reserve notes.
Another attempt by the federal government to take the Lone Star State’s gold would clearly stir a Texas-sized controversy. And that’s to say nothing of the implications of potentially using gold and silver as currency, as Article 1, Section 10, of the U.S. Constitution provides, “No State shall … coin Money.”
Why Physical Gold?
Let’s set aside for a moment the fact that there’s deep distrust of all things federal in what was once the Republic of Texas.
How in the world did two large pension funds come to own so much physical gold? It’s not a run-of-the-mill investment for such institutions.
I’d say it’s due to the influence of Dallas-based hedge fund manager Kyle Bass, who made more than half a billion dollars from the subprime mortgage collapse. Bass is an alumnus and member of the endowment board of the University of Texas.
In 2011, Bass said, “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of.”
And the money printing has only accelerated since then.
Note, however, that in recent years the University of Texas has converted some of its physical gold into paper gold in the form of futures contracts.
So what steps can you take to protect yourself – a la the Lone Star State – if you can’t wait for the Texas Bullion Depository to open?
Probably the best bet for individual investors is Merk Gold Trust (OUNZ).
Unlike other exchange-traded products, Merk Gold Trust allows you to exchange shares directly for physical gold bullion or coins, simply by filing a delivery application through your broker.
And the chase continues,