The Sound Money Reserves Act (HB.7) allows Idaho’s State Treasurer to invest some of Idaho’s idle reserves in physical gold and silver quantities.
The recent explosion in U.S. government spending and Federal Reserve money printing in response to the Covid-19 pandemic has sparked a renewed focus on the critical role gold and silver can play in hedging against systemic risks.
Idaho State Treasurer’s office currently has more than $7 billion in assets under management. The Local Government Investment Pool, Diversified Bond Fund, and the State of Idaho Idle Pool are principally invested debt paper, e.g., U.S. Treasuries, money market funds, corporate debt, repurchase agreements, and other dollar-denominated debt. These holdings carry risk based on how those corporations and institutions are managed and generally offer a very low yield (below the rate of inflation) leading to a steady erosion in overall value from their negative real rate of return.
Any reserve account with the objective of maintaining the value of its holdings should include a meaningful allocation to real money, physical gold and silver, which preserves purchasing power over the medium to longer term. Monetary metals have a low correlation to other assets, providing important diversification. Gold and silver are liquid and are bought or sold at current market value. Physical gold and silver held in a nearby depository carry no counterparty risk and are removed from Wall Street.
By including physical gold and silver in 67-1210, Idaho Code, the Treasurer could hold a portion of state funds in the monetary metals to hedge Idaho’s “idle moneys” against the risks of inflation and financial turmoil or to secure capital gains measured in depreciating Federal Reserve Notes (dollar bills, yo).
If Idaho holds gold and silver, it provides a hedge against inflation, debt default risks, stock market declines, and volatility – and it historically increases overall returns. Gold and silver do not have default or loss of purchasing power risks that bonds or other debt instruments carry.
The Treasurer’s new authority would be confined to holding gold and silver directly and in a manner that does not assume the management risks involved with other current state holdings, such as corporate bonds, treasury bills, and other debt instruments. This measure empowers Idaho to hold physical gold and silver, directly owned by the State of Idaho and kept in secure vault storage meeting industry security standards.
Ron is a professor of economics at BYU-Idaho and an Idaho state representative (LD.34). He specializes in applied microeconomics, public economics, quantitative methods, the economics of education, poverty economics, and public choice. He has been teaching for nearly 30 years, beginning at the University of Connecticut, Ohio University-Eastern, and the last 19 years at BYU-Idaho.