TEXAS TO CREATE ITS OWN BULLION DEPOSITORY, WANTS TO ...June 20, 2015
At first, when this story broke many days ago, I admit I was incredulous. But then, so many people began sending me various versions of it it became impossible to ignore, particularly when the story attracted the attention of Zero Hedge, which then wrote the following two articles about the important measure:
The reader will note that the first article appeared on June 14, 2015, and the second on June 17.
The story is huge with implications, and the first Zero Hedge article sets it all - in my opinion rightly so - within the context of the afforts of various countries to repatriate their gold, most significantly, Germany, which according to official estimates, has the world's second largest reserves after the USA, though obviously, this is changing rapidly with India, China, and Russia buying so much physical gold. But there's more to the story, and that lies in the reasons being advanced in Texas for the creation of a state depository:
“In a lot of cases with gold you may not have clear title to the metal. You may have a counterparty relationship that makes you a creditor. If the counterparty has a problem unrelated to gold, they can default and then you become an unsecured creditor in bankruptcy,” said Keith Weiner, president of the Gold Standard Institute.
This means you get whatever is left after liquidation, often just a fraction of the initial value of your holdings.
“This exact scenario happened with futures broker MF Global. I knew people who had warehouse receipts to gold bars with a specific serial number. But that gold had an encumbered title and they became unsecured creditors in bankruptcy,” said Weiner.
In Texas, two big public pension funds from the University of Texas (UoT) and the Teacher Retirement System (TRS) own gold worth more than $1 billion.
Being uncomfortable with holding purely financial gold in the form of futures and Exchange-traded Funds, University of Texas actually took delivery of the gold bars in 2011 and warehoused it with HSBC Bank in New York.
At the time pension fund board member and hedge fund manager Kyle Bass explained: “As a fiduciary, which I am in that position to the extent you own gold and you are going for a long time, and it’s not a trade. … We looked at the COMEX at the time and they had about $80 billion of open interest between futures and futures options. And in the warehouse they had $2.7 billion of deliverables. We are going to own it a long time. You are on the board, you are a fiduciary, so that’s an easy one, you go get it.”
Bass is implying that there is much more financial gold out there than physical, and that it is prudent to actually hold the physical.
Taking the gold to Texas would then also solve the counterparty risk. “In this case it’s going to be a depository, the gold is going to be there, they are not going to be able to lend it out and it won’t serve as collateral for other transactions of the bank.” said Victor Sperandeo of trading firm EAM Partners. “Because if the bank closes, you are screwed.”
“I think that somebody was looking at that, we better have this under our complete control,” said constitutional lawyer and gold expert Edwin Vieira, of the Texas bill. “They don’t want to have the gold in some bank somewhere and in two to five years it turns out not to be there.”
(All emphases in the original)
Note what's really being said here:
- There is a lack of trust in using banks to store gold, which "in two to five years" may not "be there," an indication, perhaps, that behind the scenes there is some knowledge in Texas that the stated gold reserves within the US depository system are not there, a story that, in the wake of our blog last week about American federal audits and the missing audit reports, would seem to have some merit;
- There is a lack of trust in the system vis-a-vis physical gold because of the vast difference between "paper gold" or gold contracts, and actual physical gold. In the case of paper gold, as Zero Hedge points out, there is always the "counterparty risk," or, to put it more plainly, the risk of massive re-hypothecation and hence of other parties' liens upon any physical gold backing up the paper;
- Texas has already converted various state programs to actual physical possession of gold.
But there's more in the first article, and again, it's worth citing in some detail:
Section A2116.023 of the bill states: “A purported confiscation, requisition, seizure, or other attempt to control the ownership … is void ab initio and of no force or effect.” Effectively, the state of Texas will protect any gold stored in the depository from the federal government.
And free from the threat of confiscation, private citizens can use gold and silver as money, completely bypassing the paper money system.
“People can legally do that with gold contracts. The difficulty is the implementation. Now Texas has set up a mechanism with the depository. We have accounts in that institution and can easily transfer back and forth certain amounts. So we can run our money system a gold or silver basis if we were so inclined,” said Vieira.
This would not be possible if the gold is stored in a bank because of the risks of bank holidays and bankruptcies. It would also not be possible if the federal government could confiscate gold.
(Italicized emphasis added)
However, that is not at all what the bill's sponsor, State Representative Capriglione, has in mind, according to the second article;
Epoch Times:What do you think about using gold and silver as money?
Mr. Capriglione:It’s something that’s allowed. Back in 2008 when you go and look at the crisis, it may have been rooted in subprime, but at its core what it is there is a lack of business confidence. People get scared and worried and that kind of cycle feeds on itself. [The idea is to] have something that is stable and that you can touch as opposed to being ephemeral like paper or bank money.
One of the issues in 2008 was that people would start withdrawing their deposits, which to some extent happened. And there just isn’t enough actual backing of that. What we have in this is something that people can rely on. The way we structured the bill is there are no forwards, future derivatives, lending contracts on the bullion that’s placed inside the depository. What you see is what you have. Nothing will be created, nor destroyed.
That stability helps confidence and it also provides a flight to sound money, this is going to be it.
Epoch Times: Is Texas going to have its own money?
Mr. Capriglione: Article 1 Section 10 [of the Constitution] states that this will be prohibited and we would never coin our own money. I think that’s unconstitutional.
I have bitcoins and I use it as an alternative as well. Every individual should have as many options as possible to be able to transact business. The more options individuals have the more liquidity there is, the more comfort there is, and the more stability. We don’t—and I have no intention to create our own currency, we don’t have to.
By creating this depository what we are able to do is people are able to make their transactions through our depository, completely in conformance with the Constitution.
In other words, the bill comes as close as possible to the issue of an independent currency as it can - making it possible to do so if circumstances required it, but stopping just short of doing so.
So why is Texas doing it. Well, for one thing, as the articles make clear, there is a loss of confidence in the system at the federal level and also at the level of the large prime banks. Texans can read the news just as well as anyone else, and they see the flight from the dollar on the part of the BRICSA bloc as well as anyone one, and doubtless are taking note of Russia, CHina, and India's gold buying sprees.
So what might be going on? Here comes the high octane speculation part of the equation, prompted by the final remarks in the first Zero Hedge article:
Is this the first step down a road to secession? Notably, they'll need that gold to establish their own country once they win the potentially imminent war with the US military which starts on Monday (Jade Helm).
* * *
This implicit subordination of The Fed's gold sends a more ominous signal of rising fears of confiscation and leaves us wondering just how long before every state (and or country) decides to follow Texas' lead? (All emphases in the original)
Now I doubt there's any official talk in Texas of secession (though I don't doubt there's quiet behind the scenes grumbling there, just as there is throughout the USA). What is really of interest in both articles is the notion that the Federal government might challenge the bill, which, if it did, would automatically throw any such challenge to the US Supremes, that wonderfully ideologically polarized body that can be bought off or blackmailed just as easily as any other body in the country. In that case, a potential scenario emerges, one which, I imagine, must have the financial oligarchs' antennae quivering and pulsing with anxiety and suspicion. Suppose that the State of Texas, in its argument, produced evidence as part of its argument to butress its reasons for the bill, that the audits of the US gold reserves and depositories are...well... in tatters. Indeed, we've covered this story just last week in another blog. (See MISSING AUDITS OF THE FED’S GOLD?) All Texas is trying to do is repatriate its gold (which, you'll note from the articles, Texas has already converted state funded plans to physical gold). Now imagine at this juncture, countries like Ecuador or, much worse, Germany (supposedly possessing the free world's second largest gold reserve, much of it in the hands of the US), filing amicus curiae briefs in any such action, to the effect of "Yea, we've been trying to repatriate our gold too, and haven't been too successful, and here are our facts and figures on the matter." Thus, their representatives could be in any hearings, and their press would not be subject to any potential gag orders. One could imagine a whole list of such countries lining up to file such briefs. Thus, in short order, things could get very interesting in a very big hurry, particularly if, as the Zero Hedge's first article suggests, other states follow Texas' lead and establish similar bills.
And in fact, the Zero Hedge article is not entirely correct, for other states have passed legislative resolutions underscoring the constitutional provision for coinage of money. So, one might watch states such as Arizona, North Dakota, or Montana, following Texas' lead by extending resolutions to the acual establishment of state depositories. Under such circumstances, with friend of the court briefs being filed fast and furiously, things could quickly spiral into a nightmare for financial oligarchs.
The bottom line here is that this is a huge story, one which, I suspect strongly, will not diminish with time.
My thanks to so many of you that shared these and other articles about this story, and...
...See you on the flip side...