Thursday, June 18, 2015

The Legend Of The Lone Star Gold, Con't.

On Monday I talked about that truly weird state bullion depository that Texas Republicans will set up with legislation this week, a move that reeks of nullification and secession in an increasingly unhinged Republican party afflicted with Obama Derangement Syndrome. As TPM's Brian Murphy explains, the reality behind this move is far more disturbing.

As I said, if this looks like Ron Paul goldbug insanity to you, that's because it is.

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.

Oh, but it gets worse.  This is all smelling like a giant gold bug con job, especially since the the work of guarding and administering the gold depository will be privatized.

But where did Texas get this gold anyhow?  That's an even stranger story.

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.

And the best part?  Over the last couple of years that investment in physical gold has lost money.

No, this is 100% Tea Party nutjob territory we're in with this story, and it only will get worse. Remember, not even Rick Perry went this far.


D. Potter said...

Entirely aside from everything else, this situation begs to be a heist movie.

Horace Boothroyd III said...

This just goes to show, why, fifty years from now, Harvard University will continue to possess an endowment capable of buying most of the colleges in America outright while the University of Texas system will plunge into poverty and the most ferocious backbiting the minute that crude runs out. No wonder the Texicans and their neoconfederate allies are fighting so viciously to keep the American economy shackled to fossil fuels.

tomstickler said...

Normally I would agree with every point in this post, but it always pays to check the math. Based on today's gold price of $1,202/oz, Texas is ahead on its physical gold investment by $34 million, less the $1 million/year storage bill. Next month? Who knows?

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