Reality is getting in the way of a golden opportunity
Two years ago, the Texas Legislature set in motion a plan to bring the state’s gold back home. About $650 million of it is sitting in a vault in New York, incurring more than $600,000 a year in storage fees. Why not build a facility to hold it ourselves?
The state comptroller is now executing on that common sense goal. But bringing Texas’ gold back to Texas is more complicated than it sounds — which could be why no state has ever done it before — and the plan for doing so still has some large unanswered questions.
Foremost among them: Once the gold leaves New York, it becomes difficult to sell if the state ever needs the cash.
On Wednesday, officials announced a big step forward in implementing the 2015 law that authorized a state-administered metals depository: the selection of private-sector partner to build the vault at its own expense, with oversight by the state treasury. Lone Star Tangible Assets, or LSTA, a Texas company that owns such businesses as WholesaleCoinsDirect.com and an e-commerce platform called the U.S. Gold Bureau, won out over five other bidders. Lone Star
has a facility near Austin and will be building another to meet the state’s specifications. But there’s one requirement that might be more challenging.
The reason people store gold in New York depositories is they’re able to become members of COMEX, a metals exchange with standards that ensure all gold transmitted between accounts is in fact solid gold. When bullion comes in from other places, it has to be melted down and measured to make sure it’s exactly the value it’s claimed to be. To facilitate trade between member institutions, COMEX only licenses depositories within about 150 miles of New York City.
The University of Texas — the owner of that $650 million in gold bars, which would fit in a big bathtub — has said it won’t transfer it to an institution that’s not a full COMEX member, in order to maintain the ability to buy and sell parts of the cache at affordable rates. Still working on it
So: How exactly is the new depository planning to bring Texas’ gold back to Texas, which was the entire point?
Tom Smelker, the Treasury official appointed administrator of the new bullion depository, said the solution is still being figured out.
“So far, we don’t think they’re interested in having a partner down in Texas,” Smelker says of COMEX. “But we’re going to work on that.”
One idea is to basically create a COMEX alternative. Lone Star Tangible Assets, the vault builder, says on its website that it will try to work with state banks, COMEX members and metals refiners to enable quick and easy cash sales. The state representative who sponsored the original legislation, Giovanni Capriglione, even expressed a vision of Texas as a “commodities hub” for North America that could compete with New York for deposits.
But Phillip Streible, a commodities broker at RJO Futures in New York, doubts that a Texas-based network could replicate COMEX. There are only a handful of metals exchanges in the world, after all, and COMEX is among the most efficient.
“I don’ t think it’ s large enough or has that large enough of gold holdings in order to provide both side soft he trade ,” St reib le said of Texas .“It’ s a great concept. I just don’ t think they can pull it off .”
The state, however, has a fallback position. Even if the Texas Bullion Depository doesn’t work for the University of Texas’ gold, it could attract enough private deposits to keep it running.
Some companies are already making the bet that gold owners need a place to keep their assets safe, and there’s no better place than Texas. Among them is California-based Noble Gold, one of the unsuccessful bidders for the state operation. Remember Jade Helm
Noble Gold opened a depository near Dallas about four months ago. Charles Thorngren, Noble Gold’s CEO, says many oil and gas businesses use gold to hedge against currency risk, and need a place to store it securely. Meanwhile, political and economic uncertainty seems to be rising, and he thinks Texas — with has demonstrated a fierce commitment to state and individual rights — is the only place willing to defend private assets should the federal government attempt to seize them. (Indeed, Gov. Greg Abbott mobilized the Texas State Guard in 2015 to monitor a U.S. military exercise after suspicions arose that it could be part of a federal takeover.)
“If I have to choose a state that will fight the government to keep my metals safe, there’s only one state I’m choosing,” Thorngren says. He doesn’t cite particular instances in which that might be necessary but says that some clients like to be prepared “against any possibility.”
His clients don’t need him to be a member of the COMEX because they hold their gold for the long term, rather than trading or leasing it out. For example, more people are opting to put their retirement savings in gold, in order to avoid losing it all in a stock market collapse like the one that struck in 2008.
The state-sanctioned bullion depository will be able to participate in that business as well, and people might feel more comfortable with some government monitoring, Comptroller spokesman Chris Bryan says.
“That’s one of the unique things the project brings to folks who are interested in storing gold,” Bryan says. “This is bringing the kind of innovation and entrepreneurial spirit that the private sector has, and adding some government oversight and a little bit of regulation to make sure that folks can really trust it.”
If it works, the state will derive some income through a revenuesharing agreement with LSTA. If it doesn’t, well, no taxpayer money went into building it anyway.