I’m very impressed that Governor Abbott has signed the bill to create a bullion depository in the state of Texas. With Eye on Fiscal Armageddon, Texas Set to ‘Repatriate’ Its Gold To New Texas Fort Knox details the whole plan and it’s concomitant flaws. What they don’t cover is probably he single biggest issue, the TRUE cost to Texas taxpayers…
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.
Now, this is just complete bullshit since those contractors are only doing this because they want to get paid and none of those people are going to spend money without something from the state, like a guarantee and insurance to cover associated risk (and no, Rep. Capriglione, I’m not talking about just the risk that some folks might come and steal the gold which is possible, but I’m also referring to the counterparty risk inherent in a scheme like this which effectively sets up an exchange AND allows dealers to set up mutual funds with almost no disclosure). A private insurer will charge a pretty penny to cover this so I’m sure it will be the state who steps in, with a significantly discounted rate that doesn’t begin to cover the cost of the actual risk.
Now, with physical gold outside of the range of a regular exchange, all this Texas gold will trade at a decent discount to spot gold because it has to be transported. Which means ALL gold traded in this hybrid exchange depository will trade at a discount to NYMEX because it has to be delivered there ultimately since it’s the most liquid market in the US. So, for all you broker dealers looking to set up with this thing, you’re cutting your margins likely below profitability right out of the gate.
Then there’s the issue of using drafts on the bank as a sort of gold backed transactional currency but it doesn’t explain WHY this would matter… except as an inflation hedge which is fine as long as you ignore the fact that the price of gold has actually deflated. Substantially.
Finally, this is all a complete waste of time since the State of Texas HAS NO GOLD. UTIMCO has some gold, which will flip to a loss if it’s ‘repatriated’ to Texas.
I have to wonder, given Rep. Capriglione’s profession, if he has personal plans to profit from this, solely or in partnership with some of his donors.