States Seeking to Hedge Financial Risk Now Looking to Gold and Silver

You don’t have to have been paying a great deal of attention to notice that precious metals increasingly have been on the minds of a lot of Americans. Last year, the economic fallout from the COVID-19 pandemic prompted a surge in the prices of both gold and silver. From April to August, as the nation saw its highest unemployment rate since the Great Depression and both the government and Federal Reserve initiated unprecedented policy rescue measures, gold jumped 30% and silver soared a whopping 100%. 

And as if the performance of metals in 2020 wasn’t enough to let you know that more Americans were loading up on gold and silver, there’s what they actually were saying about gold and silver. In survey results detailed by the New York Times last July, one in six Americans said they’d bought precious metals since that May. The same survey also determined that nearly half of all Americans were seriously weighing a gold purchase.

But perhaps even more revealing than the broad move toward precious metals on the part of individual savers is the activity among some states to embrace physical gold and silver. Just last month, the Idaho State House overwhelmingly voted in favor of a bill that would allow the treasurer to purchase gold and silver as a way to diversify the state’s reserve funds.    

   

Make no mistake – I think the growing interest in metals among the citizenry says a great deal about the esteem in which metals are held. But when state governments – which have for so long demonstrated an unwillingness to look beyond cash and other “mainstream” assets when it comes to investing their resources – begin clearing a path to gold and silver, a case could be made that such movement serves as additional validation of the potential value offered by metals.

Idaho Legislators Seek to Protect State Funds with Precious Metals

Idaho’s House Bill 7 (HB7) – the Sound Money Reserves Act – is a notable piece of legislation for those who’ve long felt gold and silver have been overlooked as potentially useful assets for the purpose of mitigating financial risk. If ultimately signed into law, the measure would permit the state treasurer to buy gold and silver as a way to help diversify – and thus hopefully better secure – the “idle moneys” in Idaho’s coffers. In February, the Idaho State House voted by a substantial 51-19 margin to pass HB7. The bill has since moved over to the state senate for further consideration. 

Concerns about the safety and stability of reserve funds have been growing among many states in recent years, thanks to the economic fallout from the pandemic as well as due to a generally increasing strain on states’ resources. HB7 co-sponsor Rep. Ron Nate underscored this perceived vulnerability in testimony before the Idaho House State Affairs Committee.

“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. Presently, the Idaho State Treasurer’s Office has more than $7 billion in assets under management.

Two State Pension Funds OK Use of Gold to Hedge Portfolio Risks

To be clear, Idaho isn’t the only state where precious metals are gaining favor among politicians and government agencies. State representatives and senators in South Carolina and Tennessee have initiated efforts similar to those of Rep. Nate. And public pension funds in Ohio and Texas already look to gold as one way to diversify portfolio risk.

In South Carolina, Rep. Stewart Jones has filed House Joint Resolution 3379, which would establish a committee to determine the feasibility of establishing a precious metals depository in the state. The purpose of the depository would be to store physical gold and silver for use by South Carolina in making investments for the benefit of the state as well as for diversifying reserve funds. In Tennessee, Rep. Bud Hulsey and Sen. Paul Rose each have introduced separate bills that would require the Tennessee Advisory Commission on Intergovernmental Relations to evaluate the feasibility of creating a state gold depository. 

Two states already have made gold eligible assets for their pension fund resources. Last summer, as the economic consequences from the pandemic continued to mount, the Ohio Police & Fire Pension Fund (OP&F) approved a 5% allocation into gold based on a recommendation from Wilshire Associates, the fund’s investment consultant. According to FXStreet, the move by OP&F makes it the second state pension fund to include gold among its eligible assets, joining the Teacher Retirement System of Texas (TRS). FXStreet suggests OP&F and TRS could own roughly $1 billion in gold a piece at any given time.

Outlining the reasons for their move, OP&F said at the time that both the fund “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.” 

Commenting on the OP&F gold allocation, George Gero of RBC Wealth Management suggested we could see more pension funds look to gold as threats to underlying portfolio stability become more concerning. 

“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.”

If States Are Buying Precious Metals…Does That Mean You Should, Too?

There indeed appears to be a growing interest on the past of states to rely on precious metals as a way to help mitigate risks to their financial reserves. Should retirement savers interpret this interest as validation of gold and silver as savings assets?

On the one hand, any further “validation” of gold and silver – beyond what retirement savers already know about them – shouldn’t be necessary to at least consider including the metals among one’s holdings. I noted at the outset of this piece the solid numbers posted by gold and silver last year as the immediate consequences of the pandemic paralyzed the global economy. And 13 years ago, when the financial crisis threatened the stability of the worldwide financial system and central banks went into overdrive printing money, gold and silver rose – quite literally – to the occasion. From 2008 to 2011, gold climbed 160% and silver soared 400%.

Still, I believe there is something to be said for entities that have so much to lose opting for physical precious metals as a way to help safeguard their reserves and other essential financial resources. That states now seem to find so much value in gold and silver as risk mitigation assets may not be a good reason, by itself, for retirement savers to buy precious metals. But it is, in my opinion, one more reason to at least ponder if there could be some potential benefit to owning gold and silver – particularly at a period in time many regard as one of the most economically uncertain in modern history.