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    Texas wants its gold stored in the state, not at Federal Reserve in New York

    A common reason to hold gold is as insurance against bad events.
    Reuters/File 2013
    A common reason to hold gold is as insurance against bad events.

    Texas has generally been the at the front of the pack of a certain variety of uber-hawkish, vaguely paranoid monetary policy talk over the last few years. Recall it was the state’s governor, Rick Perry, who while running for president strongly suggested that Ben Bernanke would be committing treason should the Federal Reserve print any more money.

    But now some in the state, including Perry, are looking to put their money where their mouths are. Literally.

    Perry and some in the Texas Legislature want to bring the roughly $1 billion worth of gold held by the state university system’s investment fund onto Texas soil, from its current resting place in a vault in New York.


    ‘‘If we own it,’’ Perry said on Glenn Beck’s radio show, according to Texas Tribune, ‘‘I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.’’

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    Here’s the thing. Perry’s push to relocate the state’s gold to a newly created Texas Bullion Depository in a strange way makes perfect sense. It lays bare the rationale for investing in the yellow metal and illustrates the strange role gold plays in a modern economy and investors’ psyches.

    Some basics: People speak of gold as an investment, but that’s not quite right. When you buy stock, you buy a claim to the future profits of that company. When you buy a Treasury bond, the government is pledging to pay you a certain amount on a certain schedule. But when you buy an ounce of gold, no matter how long you will hold it you still have exactly one ounce of gold.

    If anything, gold has a negative yield. Because you have to store that gold, if you keep it in your house, there is a risk of theft. If you keep it in a safe deposit box, you will pay a fee.

    If Texas brings its gold home, it will deal with this in a very real way: Whatever it costs to build, maintain, and guard a facility secure enough to stash $1 billion of gold will essentially subtract from whatever investment return the holdings offer. (The lawmaker advocating the plan pointed out that only about 20 square feet of space would be needed, which kind of misses the point. It’s not the real estate cost that is expensive, it’s the technology and manpower needed to prevent the heist of the millennium.)


    Texas media outlets have reported the gold is at the Federal Reserve Bank of New York. All institutions that store gold invests vast sums to ensure the security of their vaults. Texas is considering replicating those security costs and giving up that convenience. But why?

    The most common reason to buy gold is as something of an insurance policy against very bad events, such as significant inflation. In the more plausible scenarios, like a return of 1970s-style period of 10 percent or so annual price increases, gold would indeed be quite a good investment. But in that scenario, Texas would have no problem getting access to its gold in New York. There would be no need to go to the trouble and expense of setting up a miniature Fort Knox in Austin.

    For it to make sense to store your own gold, you have to be insuring against some much darker possibility, like a collapse of the US government and monetary system.

    In some episode of hyperinflation and government collapse, paper dollars will be no good, but gold would probably be the medium of exchange for buying food and guns and whatever else is needed to prosper in the post-apocalyptic hellscape.

    Similarly, if Texas were to decide it no longer wished to be part of these United States (a notion Perry himself seemed to joke about in 2009), one could imagine the desirability of its having a gold supply close to home. That would put New York banks, regulated by the US government, in the difficult position of having to determine whether the rebel republic was the rightful owner of the gold.


    Texas, it is worth noting, is not the only large, prosperous place with a hard-money mentality. Tis year, Germany’s central bank said it will relocate billions’ worth of gold from vaults beneath the New York Fed and France’s central bank, guarding them in Frankfurt instead.

    So there you have it: Texas, the Germany of America.