Giovanni Capriglione came to his understanding of gold the way most do. He opened his eyes and looked around. The world does not always shape to the narrative that the educational system instructs and that government institutions desire. His mother is from Venezuela, and his father is from Southern Italy. His parents experienced the negative results of fiat currency in their native countries. Watching one’s wealth, savings, and hard work disappear at the whim of government fiat is a lesson that gets ingrained for life. His father learned from repeated lira devaluations to trust fiat currency accordingly. Venezuela has its own history with currency devaluation and is currently in the throes of hyperinflation. Food shortages, misery, and economic implosion are the predictable result. Hard assets and barter become the currency of choice when governments renege on their trusted bond with citizens to maintain the value of currency and instead embark upon the devaluation path. This understanding gets passed forward over generations. The inherent understanding of gold is what I term the gold paradox. While the economics profession has happily ceded its academic understanding of gold, organic understanding of gold remains innate to the human condition.
Extremely bright and a math whiz, Giovanni has a B.S. in Physics from Worcester Polytechnic Institute and an MBA in Finance from Santa Clara University. Giovanni’s academic “aha” moment came during a Behavioral Finance class in his MBA program. Giovanni describes his moment with the word “faith”. Giovanni’s insight was that the behavioral model is responsible for finance, not the rigid mathematical model. That humans cannot be molded into mathematical equations and programmed to react as automatons. He learned in Behavioral Finance that there is no hard constant in fiat currency. Instead it is defined by faith. Faith that the government will uphold its promises; faith that government functionaries can define value in a note whose intrinsic value is the worth of its paper.
Economists have trended toward a hard, mathematical model for economics since the 1870s. Call it physics-envy; the idea that humans can be reduced to a mathematical constant, plugged into an equation, and a desired output achieved. This is theoretical justification for elevating government economic control over free markets. Maintaining a currency’s value is the converse of behavioral economics. Currency value requires an unchanging, fixed rule of value. Mankind has selected gold as the proxy for monetary stability. A fixed currency link with gold is necessary to facilitate behavioral economics that can’t be modeled or predicted. Our Ph.D masters have it backward. They use floating fiat with constantly changing value to facilitate their rigid, plug-in mathematical economic model. Computed with complex hindsight data, that is only as relevant as its data miner’s theories, their models spit out economic certainties that continuously blow-up. They can’t explain why their models don’t work, because in their world elegant equations based on theoretical assumptions do not lie. They are left to invent new, fail-safe excuses for their failure, such as “secular stagnation”, and are rewarded in catch-22 fashion with increased responsibility.
Giovanni’s grasp of the behavioral model defined his outlook as he entered his professional career in private equity. His institutional view changed when he witnessed the 2008 financial crash fallout from his vantage point in private equity. Government malfeasance, corruption, regulation, and incompetence opened his eyes to the fragility of our financial system. Representing private equity’s efforts to deal with the fallout, he became intimately involved in the government response—TARP, mark to market, Dodd Frank, TBTF, and the general gaming of the system at the expense of those who play by the rules. Giovanni decided to run for elective office.
He got crushed by the incumbent in his first attempt to run for the Texas House of Representatives (R) representing District 98. With no sponsor, name recognition, or familial history in Texas, Giovanni got involved in local grassroots efforts to roll back property taxes and the Robin Hood school funding fiasco. He knocked on the door of 7,000 constituents and established himself and his name in the community. He won easily against the same incumbent in the next election.
Most freshman representatives to elective office are content to hang back and learn the ropes, but Giovanni authored 25 bills in the 2013 legislature session. One of those bills was for the creation of the Texas Bullion Depository (TBD). It failed on its first introduction because Giovanni had not worked out the funding and cost details. He introduced it again in the 2015 legislature session and the bill passed. This is first-of-its-kind legislation that establishes a bullion depository where Texans can safely store their gold and precious metals. Giovanni crafted the legislation to prevent federal interference in the right of Texans to own gold. The TBD is also set up to act as a bank. Depositors can transact commerce based upon their gold holdings. The TBD is a private entity under the control of the Texas Comptroller. Interested private parties have submitted proposals for creation of the TBD and the Comptroller should announce the winner soon. A ready client for the TBD is $650 million in gold held by the University of Texas Investment Management Company and stored at the HSBC Bank in New York.
The right to safely own and transact with gold protected by the state has widespread legislative support. In their hometown meetings, Republican, Democrat, and Libertarian representatives are finding universal constituent support and excitement for the TBD. With the TBD, Texas leads the nation in tapping into the growing alarm with the Federal Reserve’s incompetence at maintaining the value of the dollar. Texans will have a safe, alternative vessel for protecting their wealth.
Gold has always been money. Its properties, with the exception of limited industrial use, are monetary. While other national currencies are largely accepted in the U.S., alternative currencies run afoul of legal tender laws. Gold and silver are “collectibles” and considered capital assets for tax purposes. The capital gains tax rate on “collectibles” held for one year or longer is 28%, compared to 15% for stocks or bonds. States also levy sales tax on the exchange of gold and silver. States are fighting back on this issue. In 2011 Utah was the first state to declare gold and silver coins legal currency exempt from sales tax. Texas eliminated the sales tax levied on purchases of gold, silver and platinum bullion and numismatic coins in October 2013. Currently, at least 31 states have passed legislation repealing some kind of bullion coin tax, with more states joining the movement every year. The Constitution and the Coinage Act established the dollar defined at a fixed weight of gold or silver. This was the case in the U.S. from 1792 until 1973. Today, legal tender laws, regulation, and taxation prevent the use of precious metals to serve as currency. The desire for gold backed currency is a result of the Federal Reserve’s floating dollar losing 97 percent of its value since Nixon ended Bretton Woods in 1971.
The TBD in addition to acting as a precious metals depository, establishes a bank available for transactions. As discussed, current laws make transacting with precious metals economically prohibitive. Imagine having to calculate a capital gains tax for every dollar transaction. The TBD will make this inequity abundantly clear. Congress can alleviate this problem by repealing the designation of precious metals as capital assets. The Sound Money Promotion Act in the Senate of 2011, and The Free Competition in Currency Act of 2011 in the House proposed legislation “to repeal the legal tender laws, to prohibit taxation on certain coins and bullion, and to repeal superfluous sections related to coinage”. These bills died, but the TBD will incentivize Congress to reintroduce and enact a similar bill. The U.S. awaits the next Jack Kemp in Congress willing to attach their name and legacy to the return of sound money.
Giovanni Capriglione is a man on the margin. A man who steps from the shadows to affect positive change. Already, representatives from Tennessee, Arizona, Utah, New Mexico, and New Hampshire have contacted Texas to enquire about establishing similar bullion depositories. What Giovanni understands is that when Texas establishes the TBD banking institution and produces the best “accounting unit” in the world—a unit backed by gold—capital will flow to Texas. Texas is known for cattle, oil, open spaces, live music, beautiful women, and its independent spirit. It might as well add “world financial center” to the list.