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Some States Looking to Hedge Financial Stress with Precious Metals

February 19, 2021   |   Posted By Isaac Nuriani

Some States Looking to Hedge Financial Stress with Precious Metals

The societal turmoil and uncertainty of the ongoing COVID-19 crisis continues to churn. As it does, there are signs many Americans are turning to precious metals as a way to help diversify their savings. Remember the economic fallout from the pandemic as it spread like wildfire through spring and summer of last year? News began to surface that a significant number of citizens had gold squarely in their sights. According to a July 2020 New York Times article, one in six Americans had invested in precious metals between May and July of last year, and about half of the country was seriously considering a gold purchase.[1]

It turns out individual savers aren’t the only ones with a growing interest in using precious metals as a hedge. Some U.S. states have become particularly concerned about the resilience of their own financial resources. Several now are making moves toward including physical gold and silver among their assets. Just last week, the Idaho State House overwhelmingly approved a bill that would allow the state treasurer to buy precious metals as a way to potentially lower the effects of economic volatility on reserve funds.

Gold and silver are considered “alternative” assets. That always seemed ironic to me, considering how highly regarded the metals have been for millennia and how universally prized they are as diversifiers. That several states now are demonstrating a greater interest in gaining some peace of mind with precious metals further underscores that irony, in my view. I think the move toward metals by some states is particularly noteworthy. And it may prompt some retirement savers to look more thoughtfully at the potential benefits offered by gold and silver.

Idaho State House Overwhelmingly Approves Bill to Diversify State Funds With Gold

House Bill 7 (HB 7) – the Sound Money Reserves Act – has been making its way through the Idaho State Legislature for some time. Its progress has been watched closely by the Sound Money Defense League, a precious metals advocacy organization. Last Friday, the group reported a significant development: By a sizable margin, 51 to 19, state representatives passed HB 7.[2] If it eventually becomes law, the measure would give Idaho’s state treasurer the authority to purchase physical gold and silver as a way to potentially reduce state reserve funds losses due to economic stress. Having cleared the Idaho House of Representatives with plenty of room to spare, the bill now moves directly over to the state senate for further consideration.

In earlier testimony before the House State Affairs Committee, bill cosponsor Rep. Ron Nate emphasized why he thinks the measure is so important. “With new concerns about financial instability, it makes sense for investors, and it makes sense for states, to turn to real assets, especially in terms of precious metals, to protect their funds,” Nate said.

Commenting on the legislation, Sound Money Defense League director Stefan Gleason said, “An allocation to physical gold and silver fits squarely within the objective of protecting Idaho ‘idle moneys’ against financial risks and would logically be included in a list of safe investment options.”

The news about HB 7 unquestionably is big. But it’s worth noting that some states have gone even further than Idaho has up to this point in looking to help diversify their financial resources with precious metals. In fact, a couple of state agencies have moved ahead with plans to try lowering the overall vulnerability of pension funds by adding gold to their asset base.

State Pension Funds Now Using Gold to Balance Portfolios

Last summer, amid the pandemic-cued volatility rapidly spreading throughout the economy, Kitco reported that the Ohio Police & Fire Pension Fund (OP&F) approved a 5% allocation into gold.[3] The stated purpose of the move was to diversify the portfolio and hopefully hedge against possible inflation.

Wilshire Associates, an independent investment management firm that serves as OP&F’s general investment consultant, made the gold purchase recommendation. In a statement, the fund said, “OP&F and Wilshire believe that the addition of gold will give the portfolio a strong diversifier to its growth-oriented investments as well as provide an effective hedge against inflation.”

According to FXStreet, the move by OP&F into gold makes it the second of only two public pension funds known to own the metal.[4] The first was the Teacher Retirement System of Texas (TRS). FXStreet says both OP&F and TRS expect to own roughly $1 billion in gold apiece at any given time.

Will we see more pension funds add gold to their holdings? Some experts, such as RBC Wealth Management director George Gero, think so. In the previously referenced Kitco article, Gero said an increasing number of pension funds will give gold a careful look as they search for ways to hedge their risks. “More and more pensions are going to need to protect themselves against rising inflation and the falling value of currencies,” Gero said. “They are going to be looking very closely at gold.”

Should Retirement Savers Follow in the Footsteps of States Turning to Gold?

So, as you can see, as diminished economic conditions threaten the financial solvency of many American households, so, too, do they threaten the solvency of some U.S. states. I think it has to be reassuring to gold and silver owners that a couple of states already have made a commitment to gold as part of an effort to secure their pension funds. Idaho and Ohio are not the only ones.

In South Carolina, Rep. Stewart Jones introduced House Joint Resolution 3379, which would create a committee to determine the viability of a precious metals depository chartered by that state.[5] A similar effort is ongoing in Tennessee. There, Rep. Bud Hulsey and Sen. Paul Rose each have introduced separate bills that would create a commission to study the feasibility of creating a state gold depository.[6]

Legislative efforts designed to enable both South Carolina and Tennessee to help diversify their reserve funds with physical precious metals still have a long way to travel. But the fact that such initiatives are in motion at all says a great deal about the degree of concern for the stability of state resources. It also says a lot about the esteem in which gold and silver are held by many as effective diversifiers.

So what about retirement savers? Should they be taking a cue from states looking to gold as a way to possibly help mitigate the financial stresses of inflation and economic upheaval?

Ultimately, that’s a question they’ll have to answer for themselves. Speaking for myself, I do think it’s noteworthy that U.S. states and even central banks continue to have such high regard for gold as a hedge.[7] By itself, the apparently growing appeal of gold to state and federal governments is not a singularly compelling reason for an individual saver to own it. But I do think it’s a bold expression of faith in a time-honored asset by entities that have a great deal to lose during this period of uncertainty.

 

[1] Danielle Braff, The New York Times, “Where Is All That Gold Being Stored?” (July 28, 2020, accessed 2/18/21).

[2] JP Cortez, Sound Money Defense League, “Idaho House Votes to Encourage Holding Physical Gold and Silver to Protect State Reserves” (February 11, 2021, accessed 2/18/21).

[3] Neils Christensen, Kitco.com, “Ohio Pension Fund jumps into gold market with 5% allocation” (August 31, 2020, accessed 2/18/21).

[4] Stefan Gleason, FXStreet.com, “Pension funds start looking to Gold to avert disaster,” (September 1, 2020, accessed 2/18/21).

[5] Rep. Stewart Jones, South Carolina General Assembly, “H. 3379 – A Joint Resolution” (January 12, 2021, accessed 2/18/21).

[6] Rep. Bud Hulsey and Sen. Paul Rose, Tennessee General Assembly, “HB 0353 & SB 0279” (February 10, 2021, accessed 2/18/21).

[7] Georgia Williams, Investing News Network, “10 Top Central Bank Gold Holdings,” (November 19, 2020, accessed 2/18/21).

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