The State Where Gold Buys Groceries

04/20/2012 9:55 am EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

Controversial new legislation passed in Utah allows physical gold and silver to be used as payment for goods and services, writes Andy Waldock, who discusses the bill and its “game-changing” impact.

One hundred and fifty years ago, Congress passed the Legal Tender Act, authorizing the use of paper notes to pay government bills. This week, Utah Governor Gary Herbert signed into law House Bill 157, allowing gold and silver to be used as currency in place of increasingly worthless paper notes.

Several states have proposed similar bills, but Utah’s is the first to pass. The bill provides for transactions based on the weight of the metals to determine their value rather than face value. This allows the use of gold and silver bullion to be used as payment rather than the limited scope of federally minted precious metal coinage.

There are two distinctly separate issues at work here. The first is the Governor’s expression of his constituents’ voices. There is genuine concern that the easy money policies in place since September 11 which includes TARP, Quantitative Easing 1 and 2 (and possibly QE3), Operation Twist, and so forth, will seriously devalue the greenback’s worth.

This is not tin-foil hat, alarmist conjecture. US money supply has ballooned over the last ten years. Money supply, as defined by M1, which is currency plus demand deposits like checking and savings accounts, has mushroomed from $1.25 trillion in April 2002 to $2.22 trillion currently. That’s an increase of 77%. Furthermore, the Federal Reserve forecasts M1 to grow at a 17.4% rate over the next 12 months.

Theoretically, each new dollar printed is worth exponentially less than the one that preceded it. The dollars you hold in your pocket should be worth 77% less than the same dollars in your pocket ten years ago. Clearly, there is a dollar-devaluing argument to be made.

The second issue is the game-changing effect this will have on the physical gold and silver trade. This could truly be a watershed moment.

For example, let’s say you’ve been ahead of the game and began buying gold and silver years ago. Good for you! Generally, this meant buying metal from a coin dealer who charged you a premium above the spot market for your purchase, and then the government charged you sales tax on top of that merchant’s premium. The end result is that you’ve been overpaying to get in the market. Think of it as a front-end loaded mutual fund.

Now that you’re ready to get out, you find yourself offered below-market prices on your physical holdings, and due to your success, you’ll be issued a capital gains form to pay Uncle Sam his share. The end result is that being right about the market meant you had to pay up a total of four times.

Utah House Bill 157 will now treat precious metal transactions just like currency exchanges. In other words, if you ask for change for a $100, you’ll get the entire $100 back. You’ll be able to cash in your precious metal holdings for fair market prices, or simply use precious metals to make purchases, payments, or deposits. The law states that metals don’t have to be accepted, but if they are, it will be by weight of the metal and the market price for it.

Finally, the kicker, as I’ve read it, is Utah will offer a one-time tax credit to offset capital gains on any metal that is being exchanged for paper. The capital gains and tax reporting nature of getting out of your holdings will work like a currency exchange. This eliminates the physical “black market,” or shadow market, of physical transactions. This will avoid multiple calls while shopping transaction values and eliminate the tricky conversation of tax reporting issues.

Who would have thought that seldom mentioned Utah would be the pioneer of such forward thinking?

By Andy Waldock of Commodity & Derivative Advisors

Do you think more states will pass similar laws as US national debt increases and the value of the dollar declines? Share your thoughts in the comments section below.

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