Last week, I discussed growing interest in some U.S. states to buttress financial reserves with physical precious metals. A focal point of that article was efforts by a few Idaho state legislators to pass a bill that would allow the state treasurer to purchase gold and silver. The bill was passed overwhelmingly by the Idaho State House and has moved over to the state senate for further consideration.
Gold and silver have made headlines in recent years for their resilience and growth performance during what has been a period of ongoing economic uncertainty. But efforts by politicians in Idaho and elsewhere to incorporate precious metals among states’ assets is more than a passing fad, in my opinion – and in the opinion of others, as well.
Peter Krauth, a former portfolio advisor and current precious metals analyst, says the heightened interest in metals is indicative of something very significant. In a recent article for StreetwiseReports.com, Krauth surveys “outside-the-box” efforts by corporations and governments to secure their financial reserves in the current climate. His conclusion? The embrace of gold by states, central banks and even one of the world’s most renowned private companies suggests that “gold is the ultimate reserve asset.”
If gold is the ultimate reserve asset, as Peter Krauth contends, then what about cash?
In his piece, Krauth wonders aloud if companies could one day be sued by investors for sitting on too much cash and not diversifying into other assets. Some companies are famous for holding on to a ton of cash. Microsoft is one that has been criticized regularly for doing it.
Holding on to a mountain of cash generally isn’t a good idea for any business seeking growth. I don’t want to get too far in the weeds here in a discussion of fundamental analysis. Therefore, I will sidestep a more protracted discussion about the potential consequences for ROA (return on assets) and COC (cost of capital) of holding on to too many greenbacks. There can be prudent reasons for a company to have a lot of excess cash on hand. However, if the cash sits idle very long, being cash-heavy can present a host of problems. These problems can include lower overall returns and heightened inflation risks, particularly during periods when monetary and fiscal policies are much less restrained.
Business intelligence and mobile software giant MicroStrategy and Tesla are recent, high-profile examples of two companies that diversified their excess cash into alternative assets. In these cases, the alternative asset of choice was bitcoin. Krauth points out that MicroStrategy dumped a half-billion dollars in to the cryptocurrency last year, while Tesla purchased 1.5 billion dollars of it in January.
But bitcoin isn’t gold, you say. You’re right. However, the moves by MicroStrategy and Tesla raise the possibility that the longstanding love affair of companies with cash as the principal reserve asset may be headed for rocky ground. Moreover, Tesla, in fact, recently named physical gold as an eligible reserve asset.
I’ll talk more about Tesla and gold in a minute. But before I do, it’s worth revisiting the potential implications of more states turning to gold as a reserve asset. This is a trend Krauth sees as particularly relevant to his thesis about gold’s primacy as a reserve asset.
In his article, Krauth mentions the bill currently making its way through the Idaho legislature. He also highlights the decision made last year by the Ohio Police & Fire Pension Fund (OP&F) to buy gold as a way to help hedge their portfolio.
And he makes a reference to Shayne McGuire, who guides the gold fund in the other state pension fund that chose to diversify into gold some years back – the Teacher Retirement System of Texas (TRS). Krauth notes that at the time of the move into gold by TRS, McGuire commented that “gold is ultimate financial insurance, the only viable and liquid asset that is not another entity’s liability and pension funds are talking about this.”
That by itself is a strong assessment of gold as a “must-own” asset. But McGuire said something more at the time suggesting gold might soon have even greater prominence among portfolio managers as a core asset.
A renowned natural resources entrepreneur with a strong historical take on the gold market shared this thought with me last week: “Just as the prudent-man rule would have prohibited asset managers with a fiduciary responsibility from owning gold just a decade ago, one day we are likely to see the exact opposite. Everyone will need to own some gold in their portfolio, which will have notable consequences for the price of gold in the future.”
In other words, there was a time not so long ago that gold was viewed by the mainstream as every bit an alternative asset. But debt has since reached unimaginable heights, real rates are negative, and concerns grow daily that financial markets are dangerously overvalued. Accordingly, some now are suggesting gold soon could be viewed as a required core asset of asset managers. One potential implication that could result is that not owning gold would be an act of financial imprudence.
Tesla revealed its January 1.5-billion-dollar allocation into bitcoin from cash in its February 8 10-K filing with the Securities and Exchange Commission (SEC). The company also said it would start accepting the cryptocurrency as a form of payment. The filing contains the following passage, as well, highlighted by Krauth:
In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds, and other assets as specified in the future.
So Tesla is eyeing not just bitcoin, but gold, too. And Peter Krauth also ponders if corporate ownership of gold will one day be a fiduciary requirement.
“The winds of change are blowing,” Krauth said. “Pension, corporate and even government fund managers are looking for alternative reserve assets. Is it such a stretch to think one day it [owning gold] will be expected and considered prudent?”
Many will argue that cash is still king when it comes to holding reserves. Some companies, like MicroStrategy and Tesla, see value in pouring money into bitcoin (although Tesla clearly is warm to gold, as well). But in terms of being anything approaching a stable, non-speculative asset with sound, identifiable fundamentals and long-term viability, bitcoin still has a host of obstacles to overcome, in my opinion.
As a potential hedge, gold has demonstrated the capacity to thrive during periods of economic and geopolitical uncertainty. That includes those times when central banks and governments resort to tactics that threaten currency debasement. And its tangibility as a physical asset certainly is unrivaled by bitcoin and even by paper dollars. Do these features make gold the ultimate reserve asset, as Krauth contends?
That will remain a matter of opinion. Less a matter of opinion is that increased attention is being paid to gold (and silver) by companies and governments as well as central banks. These institutions and agencies are shifting their focus to metals as a way to make more productive use of their cash, diversify their risk, and help offset the financial impact of allocations to low-yielding debt instruments. Retirement savers will have to decide for themselves if these moves to precious metals are examples worth emulating. At the very least, they do warrant additional scrutiny, in my opinion.
 Peter Krauth, Streetwise Reports, “Gold Is the Ultimate Reserve Asset,” (February 16, 2021, accessed 2/25/21).
 TheBusinessFerret.com, “Microsoft Financial Analysis – Destroying Value With Too Much Cash” (accessed 2/25/21).
 Jonathan Beck, BuiltIn.com, “What We Don’t Know About Bitcoin – and Why It’s a Problem” (February 2, 2021, accessed 2/25/21).
 Saloni Sardana, BusinessInsider.com, “Central banks have been big buyers of gold for over 10 years. Here is why they do it.” (August 15, 2020, accessed 2/25/21).
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