Should Idaho let its state reserves be gutted by inflation or should it invest in gold?
The recent explosion in inflation rates caused by runaway debt-funded federal spending and Fed money printing has sparked renewed interest in state legislatures, including the Idaho House, in the role gold and silver play in hedging against systemic risks.
With expanding concerns about financial leverage, debt defaults, volatility, and an erosion in purchasing power of the Federal Reserve Note “dollar,” Ohio, Arkansas, West Virginia, Wyoming, Louisiana, and Arizona recently joined dozens of other states in removing tax penalties on buying, selling, and holding gold and silver.
Meanwhile, several states are considering a modest allocation of state funds to the monetary metals – a way to hedge their investments in fixed income and other assets vulnerable to inflation.
Ohio recently followed Texas in making a 3-5% gold allocation in its public pensions, and New Hampshire, Oklahoma, Wyoming, and Idaho are examining legislation right now to empower state treasurers to hold gold and silver as a reserve asset.
The Idaho State Treasurer’s office today has upwards of $10 billion in assets under management – the value of which is rapidly bleeding away through negative real interest rates.
That’s because the state reserves are principally invested in low-interest debt paper, e.g., U.S. Treasuries, money market funds, corporate debt, repurchase agreements, and other dollar-denominated debt.
Idaho’s substantial debt-paper holdings carry both counterparty risk and low nominal yields. With inflation now running at 7% (at least), the real rate of return for Idaho taxpayers is deeply negative, perhaps greater than 5% negative.
A reserve fund with the objective of maintaining the value of principal ought to include an allocation to the money actually prescribed to the States in Article 1, Section 10 of the U.S. Constitution, i.e. gold and silver.
The monetary metals help preserve purchasing power over the medium to longer term and have a low correlation to other assets, providing important diversification and financial insurance.
Gold and silver are liquid, traded around the clock at full market value, and don’t suffer from negative interest rates.
By including physical gold and silver in 67-1210, Idaho Code, House Bill 522 (introduced by Rep. Ron Nate, who holds a doctorate in economy) would permit — but not require — the treasurer to hold a portion of funds in the monetary metals to hedge Idaho’s “idle moneys” against the risks of inflation, financial turmoil and debt default while potentially securing capital gains.
The treasurer’s new authority would be limited to holding gold and silver directly and without the counterparty risks inherent in virtually all other state holdings. That’s why HB 522 does not empower the State Treasurer to invest in electronic instruments, futures contracts, or other gold and silver derivatives.
The authority is confined to physical gold and silver, directly owned by the state of Idaho, unencumbered, and stored in secure bailment in Idaho or a contiguous state. There are at least four secure, insured, audited depositories from which to choose. The treasurer’s “diversified bond fund” is somewhat longer term in nature and is thus one sensible place for the precious metals allocation.
It’s as prudent as ever to provide the Idaho State treasurer with options to hedge against the accelerating inflation that’s been foisted upon savers, wage-earners, retirees and the Gem State itself by short-sighted politicians and central bankers in Washington, D.C.
Failing to pass HB 522 may be costly. Inflation is the match that threatens to set Idaho’s big pile of negative-yielding debt paper on fire.