New Enthusiasm for Old Investment Strategy?

Activity among central banks, state legislators and younger savers could suggest bright future for metals with central bank 2022 gold purchases now highest on record

Bullion.Directory precious metals analysis 17 February, 2023
By Isaac Nuriani
CEO at Augusta Precious Metals

During what many would say are the two most notable periods of acute economic distress over the past couple of decades – the 2020 pandemic lockdowns and the financial crisis – gold and silver performed admirably. Widespread economic uncertainty unfolded around the world in 2020, but as it did, gold and silver thrived, rising roughly 25% and 50%, respectively.[1]

Both metals demonstrated impressive strength throughout the most tumultuous years of the financial crisis, as well. From 2008 to 2011, gold appreciated more than 100% while silver surged three times that figure.[2]

It’s worth noting, too, that precious metals have thrived reasonably well since the beginning of the current millennium, illustrating their potential viability as beneficial “core” assets. Gold’s performance has been particularly notable, with the metal rising nearly 600% since January 2001.[3] Although there’s no way to know if that price trend will continue going forward, the fact that it has been this solid for the last 22 years at least serves as some gentle pushback against the longstanding narrative that gold is an underperforming asset when held for a greatly extended period.

Precious metals’ record as both a shorter-term safe haven and longer-term account optimizer may be of interest to some individual savers who are approaching retirement. But it seems that record may have grabbed the attention of others, as well.

The world’s central banks, for example. For well more than a decade, central banks have been relentlessly stocking up on gold.

U.S. states have been embracing precious metals in various forms and fashions, as well. It seems there’s a growing movement toward state legislatures taking meaningful steps to not only include gold and silver as reserve assets but recognize the metals as legal tender.

There’s more. A recent survey by Bank of America revealed that alternative assets – such as physical precious metals – are far more popular among younger savers than older savers right now. One of the reasons for this seems to be a much-higher interest in long-term savings strategies and assets centered on sustainability – and there’s one precious metal, in particular, that is poised to benefit significantly from this prioritization of sustainability.

It’s a surprisingly diverse group: central banks, U.S. state legislatures, and younger savers. This disparate growing interest in alternative assets such as precious metals suggests that gold and silver could be in the process of gaining greater favor as “go-to” core assets.

Let’s talk about it.

Central Banks Buying Gold at Record Pace

Some might say it’s more than a little ironic that central banks are stocking up on gold at a relentless pace.

Central banks practically owe their entire existence and status to the advent of fiat currencies. So it may seem odd that central banks have come to place such a high premium on gold, of all assets, as a way of adding stability to their reserves.

But as it turns out, central banks have the same concerns as individual retirement savers on a much-larger scale. Of the five most prominent reasons cited by central banks for buying gold, three are: [4]

• performance during times of crisis
• long-term store of value/inflation hedge
• effective portfolio diversifier

And it seems central banks are inclined to protect their resources in much the same way individual retirement savers might: with precious metals.

Let’s look a little closer at just how inclined they’ve been to do that.

In 2022, according to the World Gold Council, the world’s central banks purchased an astonishing 1,136 metric tons of gold. That is the highest – the highest – level of annual gold-buying by central banks on record (which goes back to 1950).[5]

There’s another feature of central-bank gold-buying I find to be every bit as interesting – if not more. It’s that 2022 also marks the 13th consecutive year that central banks were net purchasers of gold.[6]

As that statistic suggests, central banks have for some time believed the inclusion of gold among their reserve assets is very important.

But it’s not only central banks and national governments that have warmed to gold. There are signs that U.S. states also could be in the process of embracing gold and silver – in a couple of different ways.

Let’s discuss that now.

State Legislatures and the Movement Toward Metals

In recent years, there’s been a fair bit of activity by many state legislatures pursuing two precious-metals-related agendas: (1) authorizing gold and silver as reserve assets used to protect taxpayer funds, and (2) designating metals as actual legal tender.

Let’s look first at the interest among some states in using precious metals as reserve assets.

Metals as Reserve Assets

It wouldn’t be accurate to suggest state legislatures have the same level of enthusiasm for using gold as reserve assets that central banks do. But some states do seem to be interested in it. And it appears their enthusiasm is growing.

Ohio is the only state known to hold gold as a component of reserve assets.[7] Roughly 2 ½ years ago, the Ohio Police & Fire Pension Fund approved a 5% allocation to gold.[8] Texas previously owned gold through a public endowment benefitting the University of Texas and Texas A&M University, but those assets have since been liquidated.[9]

However, there’s been a meaningful uptick in legislative activity recently in some states authorizing – or requiring, in some cases – that state treasurers hold precious metals in reserves.

For example, just a handful of days ago, Mississippi State Senator Melanie Sojourner introduced Senate Bill 2966, which, if passed, would require the state treasurer to “invest no less than one percent (1%) of the excess general and special funds of the state in gold or silver bullion.”[10]

And just a few days before that, the Missouri Senate passed Senate Bill 100 – by a vote of 21 to 12. Just as with the Mississippi bill, it would mandate that the state treasurer “keep in the custody of the state treasury an amount of gold and silver greater than or equal to one percent of all state funds.”[11] The bill now moves to the Missouri House of Representatives for consideration.

At the beginning of February, the Wyoming State Senate voted 16 to 15 authorizing an amendment to the Wyoming Legal Tender Act that would require the state treasurer to “hold specie and specie legal tender” and, also, “if market conditions warrant, invest in precious metal leases or bonds payable in precious metals.”[12]

Metals as Legal Tender

Missouri Senate Bill 100, in addition to requiring that a portion of state funds be held in precious metals, also would require the state to “accept gold and silver coinage as payment for any debt, tax, fee, or obligation owed.”[13]

Missouri’s initiative has made it the furthest of all current state proposals to make physical gold and silver legal tender. But a number of states have introduced similar bills more recently, including Alaska and West Virginia.[14]

Three states already have metals-as-legal-tender legislation on the books. In Oklahoma, Utah and Wyoming, gold and silver are recognized as legal tender.[15]

Overall, this is being referred to as the “sound money movement.” According to the Sound Money Defense League, in 2022, 11 states introduced bills designed “to remove sales and income taxation on the monetary metals, create state depositories, and/or protect state pensions and reserves with an allocation to physical gold.”[16]

The apparent groundswell of precious-metals interest developing among at least some state legislatures – and the great affection central banks now have for gold – are two indicators, in my opinion, of an increasingly favorable general view of metals.

But there are other indicators, too.

Survey: 80% of Younger Savers Turning to Alternative Assets

It may seem counterintuitive, but there’s evidence younger savers could have a greater willingness to consider alternative assets than their more “seasoned” counterparts.

According to a recent Bank of America survey, 75% of savers between the ages of 21 and 42 – compared to 32% of savers 43 and older – say it’s not possible to earn competitive returns with mainstream assets exclusively.[17]

The same survey reveals that a generous 80% of those younger savers are turning to alternative assets, including commodities and other tangible assets, to help optimize their accounts.[18]

On a related note, the survey reported that while barely 20% of older respondents are using environmentally sustainable long-term savings strategies and assets, nearly 75% of millennials have embraced them.[19] Among the most popular of those strategies revolves around the transition to clean energy.

Clean-energy technology relies heavily on silver, which is the best conductor of heat and electricity of any metal. Industrial demand already accounts for roughly 50% of overall demand for silver. As the clean-energy transition gathers steam, it’s expected that this industrial demand will intensify.[20]

So, you can see there are some interesting trends right now regarding alternative assets in general and precious metals in particular. I believe this suggests a broad-based, non-financial-world change is taking place in how people view assets like this.

I’m not saying retirement savers should run out and buy metals solely on the basis of these trends. (It has to be right for you and your situation—ask your personal legal and investment consultants about it.)

However, the pro-metals momentum suggests some additional validation of physical gold and silver. And that might help reassure savers who’ve been pondering whether to consider precious metals.

[1] London Bullion Market Association, “Precious Metal Prices” (accessed 2/16/23).
[2] Ibid.
[3] Ibid.
[4] World Gold Council, “Annual central bank survey” (June 8, 2022, accessed 2/16/23).
[5] World Gold Council, “Gold Demand Trends Full Year 2022” (January 31, 2023, accessed 2/16/23).
[6] Ibid.
[7] JP Cortez, FXStreet.com, “Mississippi bill would end all taxes on, invest state funds in, Gold and Silver” (February 14, 2023, accessed 2/16/23).
[8] Neils Christensen, Kitco.com, “Ohio Pension Fund jumps into gold market with 5% allocation” (August 31, 2020, accessed 2/16/23).
[9] Spencer Grubbs, Comptroller.Texas.Gov, “The Texas Bullion Depository” (August 2021, accessed 2/16/23).
[10] LegiScan, “Senate Bill 2966” (accessed 2/16/23).
[11] Sound Money Defense League, “Missouri Senate Votes to End Income Taxes on Gold and Silver, Hold Monetary Metals in Reserve” (February 9, 2023, accessed 2/16/23); Senate.Mo.Gov, “Senate Bill No. 100” (accessed 2/16/23).
[12] State of Wyoming 67th Legislature, “SF0101 – Wyoming legal tender act amendments.” (accessed 2/16/23).
[13] Senate.Mo.Gov, “Senate Bill No. 100.”
[14] Sound Money Defense League, “Missouri Senate Votes to End Income Taxes on Gold and Silver.”
[15] Newswires, “Silver World Trends Highlights 3 U.S. States Where Gold and Silver Is Legal Tender” (August 16, 2022, accessed 2/16/23).
[16] Sound Money Defense League, “Inflation Firestorm Fuels Sound Money Movement” (December 10, 2022, accessed 2/16/23).
[17] Bank of America, “Bank of America Private Bank Study Finds Younger Investors Turning to Alternatives, Sustainability and Digital Assets to Create Wealth” (October 11, 2022, accessed 2/16/23).
[18] Ibid.
[19] Ibid.
[20] AGMR.ca, “Silver Demand Expected to Surge as the Need for Renewable Energy Grows” (June 6, 2022, accessed 2/16/23).

This article was originally published here

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