And the new depository will not just be a well-guarded warehouse for that bullion. The law Abbott signed calls for the creation of an electronic payments system that will allow gold, silver, platinum, palladium, and rhodium depositors to write checks against their accounts, making the depository into a bank – one that will create a metal-backed money supply intended to challenge the paper currency issued by the Federal Reserve - or "Yankee dollars" as one of the law's top supporters calls them. And in case the Fed or Obama wants to confiscate Texas's gold, nice try Fed and Obama! In keeping with this suspicion of the Fed and Washington, the new law also explicitly declares that no “governmental or quasi-governmental authority other than an authority of [Texas]” will be allowed to confiscate or freeze an account inside the depository. Gold that’s entrusted to Texas will stay in Texas.
The depository law is the brainchild of a second-term state representative in the Texas legislature named Giovanni Capriglione, a 42-year-old Republican from Southlake, just northwest of Dallas-Fort Worth International Airport. A private equity manager with an MBA, Capriglione was elected in 2012 after beating an seven-term incumbent with the backing of Tea Party activists. He told the Star-Telegram that when he first announced his interest in establishing a depository in Texas in 2013, he “got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository. People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold.” On his official Facebook page, Capriglione said he has “ just been overwhelmed with all of the contacts and write-ups and interviews” he’s gotten.
Fed critics herald Capriglione’s bill as a long-awaited and much-needed assault on the government’s printing press. Ryan McMaken at the libertarian Mises Institute (named after Austrian economist Ludwig Von Mises) wrote that “while the Texas depository is a government-owned enterprise, it nevertheless is an improvement since it is a case of decentralization (and arguably nullification)” that will present “alternatives to the Federally-controlled monetary and banking systems.” In what Capriglione – the depository bill’s sponsor – called “an easy to read summary of the specifics” of the law, a Tea Party site described the depository as a “game changer.” The author of the piece, a metals dealer named Franklin Sanders, wrote that “since at least 1991 I have firmly believed that whenever an electronic payments system could be established using silver & gold, it could supplant fiat currencies worldwide within two years at most, less time given a crisis. Now Texas steps forward to make it stick. And if Texas has the nerve to carry though, it will make Texas a center of world finance to rival New York and London better than Switzerland, because it contains 27,695,284 Texans and all but two of ‘em are armed & serious.” (Sanders favors the term “Yankee dollars” to describe paper currency.)
Other gold enthusiasts go further in blowing the secessionist dog whistle. “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,” writes Geoffrey Pike at Wealth Daily. The Tenth Amendment Center, meanwhile, predicted that “while [the bullion depository] won’t nullify the Fed’s monetary monopoly on its own, it represents an important step forward in that direction.”
The depository, then, will insulate Texans from a just-around-the-corner economic and geopolitical catastrophe brought on by paper money and cauterize the seemingly-still-fresh trauma of Franklin Roosevelt’s 1933 executive order making gold coin hoarding illegal during the Great Depression.
But to the trained ear, there’s an even more aggressively anti-Fed term being invoked in praise of the Texas depository: “repatriation.” Ordinarily it’s a word used to describe the movement of assets or currency from one nation to another. Yet on the website of SchiffGold, the gold brokerage owned by onetime U.S. Senate candidate Peter Schiff - whose claim to fame is to have predicted the 2007 housing crash (it happened!) followed by a death spiral of hyperinflation (still waiting!) - Texas is described “join[ing] the ranks of major global economies that want to bring their gold home from New York.” “Germany, Austria, the Netherlands, and other European nations have already begun to repatriate gold from the New York Fed or have proposed to begin doing so,” said a post on the firm’s website that ran on the same day as another predicting the coming of a “cashless society.”
According to this narrative, then, Texas isn’t just setting up its own depository, payments system, and a safe haven for gold that can’t be confiscated by the federal government. Instead, it is signaling a loss of confidence in the United States by pulling its gold out of the largest gold vault in the world eighty feet below the Federal Reserve Bank of New York’s Florentine-inspired headquarters in lower Manhattan. There, a special police force guards some 530,000 gold bars protected behind a 140-ton airtight steel and concrete framed door sealed with a 90-ton steel cylinder and time locks. Nobody enters the vault alone, ever; three people are present, even if it’s just to change a light bulb. Most of the gold in the vault belongs to other nations; the Fed stores and guards it as a courtesy to allies. Thus, the idea that Texas is somehow taking on an unwise risk by lodging $1 billion in bullion in the vault – so much so that it regards the New York bank as a foreign entity from whom gold ought to be justly “repatriated” – is to reject the practical and geopolitical realities of gold ownership in the 21st century. Even in fiction it is hard to recall a more secure site that has at its disposal more robust resources to guard and defend itself.
This is why, if you were suspicious about Gov. Abbott’s claim that “the [depository] law will repatriate $1 billion of gold bullion from the Federal Reserve in New York to Texas,” you were on to something.
Indeed, Texas has no gold bars in the Federal Reserve’s New York vault. And what the state has is not worth a billion dollars. Instead some 4,200 gold bars bought in 2011 by the University of Texas’s endowment fund (the second largest in the country after Harvard’s) are stored in the basement vault of HSBC’s headquarters at 450 5th Avenue in New York City, just south of the New York Public Library. For the last four years, the endowment has paid an estimated $1 million per year to store their gold there. (If it had been at the New York Fed the cost would have totaled about $15,400 over that period). And the new depository law does not require the university’s endowment fund to relocate the gold to Texas.
In case you’re wondering why the university’s endowment fund ever bought real physical gold to begin with (not just paper assets), that's a story almost as odd as the state's new effort to bring its gold back to Texas to ward off financial Armageddon in the country's other 49 states. That story seems to begin and end with a hedge fund manager named Kyle Bass. Bass, a former Legg Mason and Bear Stearns managing director and outspoken Fed critic, was named to the endowment fund’s board of directors (listed – and pictured – here… ahem) and immediately began pressing his apparently suggestive colleagues to shift their gold options investments into a stake of physical gold.
Bass isn’t just a casual metals speculator. When he believed nickel was undervalued he bought 20 million nickel coins to prove his point (they’re stored on a pallet in a Brinks vault). A brave new world mix of country club and prepper compound, in a Michael Lewis profile, Bass revealed that he’d prepared for a collapse of the government and economy by accumulating – in his words – “guns and gold.”
Like the others mentioned in this story, Bass believes that gold has an intrinsic value. In 2010 and 2011, he steered the University of Texas Investment Management Company’s board of directors to put nearly 5% of the then-$19 billion university and pension fund they manage into physical gold by converting options into bullion. Many large institutions invest in gold through paper investments like options. But most agree that owning actual physical gold bullion is a poor choice for a number of reasons - unless you're expecting a financial cataclysm so great you need actual physical possession of the metal. But coming off the 2008 financial crisis that's what Bass was expecting and he managed to convince his fellow board members. So for $764 million, the fund bought 664,300 ounces of the stuff in 100-ounce bars. Each of those 6,643 bars has enough of what Auric Goldfinger called “divine heaviness” that they can chip a concrete vault floor if dropped.
When the endowment fund bought the gold, their basis for calculating a return – called their cost basis – was $1,150.17 per ounce. The fund eventually traded a third of their physical gold stake for gold futures and other equities, but never reduced their overall exposure to gold. That’s why they still own about 4,200 bars worth just under $500 million. After a significant run-up and subsequent fall in 2012, gold traded on Monday at $1,186. Over more than four years that just a 3% gain for the fund before you account for the cost of housing the gold in New York and the transaction costs that will be incurred if and when the endowment fund ships the bars back to Texas or sells them to a buyer. Over the same period, the S&P 500 index - a broad measure of owning stocks - gained 60%.
Gold investors - and physical gold investors in particular – can be tempted to think of gold as a different kind of holding: a one-way investment whose sale can never be justified. Peter Schiff predicted in October 2012 that gold would soon climb from $1700 to $5000 per ounce. He keeps adjusting that timeline. Therefore, if you bought gold because it was a hedge against hyperinflation that did not happen, don’t sell the gold – just keep believing that inflation is coming in the next quarter, or next year, or that the government is secretly cooking the inflation figures. If gold prices slump, blame central banks for colluding to keep prices low. If the value of gold falls in dollars, quote a rise in another country’s currency that lets you tell a good gold story.
Fed a steady diet of fear, paranoia, and survivalism, the consumer market for physical gold is left particularly susceptible to magical thinking. So in addition to those 4200 University of Texas bars yearning to return home from Texas, that thinking is part of what helped the Texas bullion depository bill win passage in the Texas legislature.
In a telephone interview with TPM, Capriglione said during the “interim period” between legislative sessions before his second term began, he set about re-designing the depository bill to outsource many of those more expensive functions to the private sector. Although the depository is performing the same functions in the new law as it had in the older version of Capriglione’s bill, shifting the execution to private contractors yielded a so-called “fiscal note” in the legislature that calculated an “indeterminate fiscal impact to the state.” Because it's outsourced rather than run by state employees, it is no longer counted as a concrete expense in the state budget.
Moreover, by privatizing the depository’s operations, Capriglione said he was able to begin recruiting “stakeholders” who “are interested in being a part of the system we’re creating.” Rather than build a Fort Knox-type facility in Texas, Capriglione said “there are commercial vaults not being used or not at full capacity, and I’ve heard from groups willing to start their own depository and IT security companies with underground storage facilities for data centers who can make space available” for gold and other precious metals.
Most importantly, Capriglione found that by offering gold brokers and dealers the chance to become “depository agents” who can accept deposits on the state’s behalf or set up accounts with their own precious metal holdings that can then be sold off and subdivided to would-be depositors, he found a broad network of supporters for the state depository. “These agents will be licensed and bonded,” he said, “they’re middlemen who can, say, deposit $1 million of their own gold into an account and, acting as depository agents, make other accounts by virtually moving the gold.”
Yet some details have yet to be worked out. “We’re not going to allow entities outside of [Texas] to seize assets,” he said. “In 1933, the Feds seized certain assets,” he said, referring to Roosevelt’s notorious executive order (memories of which are lucratively misstated by some metals dealers). He acknowledges that because the depository law bars the federal government from seizing or freezing gold accounts, it will be necessary for Texas to “do the right thing” in “civil asset forfeiture cases.” “We don’t want illicit goods to be repatriated or criminals or drug lords” to see Texas as a safe harbor, he added. “The [state] comptroller will have to come to a conclusion with the Attorney General” on setting policy.
As of yet, Capriglione doesn’t know where the bullion depository might be located. But he dismissed a suggestion that a building known as a the “Texas Bullion Depository” will attract criminal masterminds. “You don’t need as much security because gold is incredibly heavy and hard to liquidate,” he said. “There aren’t many heists of gold bullion…nobody’s going to be able to steal 80,000 pounds of gold.”
Rushed for time, Capriglione cut short his interview before he could be asked if he had ever seen the films “Heist,” “Goldfinger,” “Ocean’s Eleven,” or “Die Hard 3.”
Brian Murphy is a history professor at Baruch College and TPM Contributing Editor who writes about the intersection of money and politics. He is the author Building the Empire State: Political Economy in Early America (Penn Press, 2015) and can be found at brianphillipsmurphy.com. You can follow him on Twitter @Burrite.