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 Bill157 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 issue is the Governor’s expression of his constituents’ voices. There is genuine
concern that the easy money policies in place since September 11th
which includes TARP, Quantitative Easing 1,2 and 3?, Operation Twist and so
forth will seriously devalue the greenback’s worth. This is not tin foil hat,
alarmist conjecture. Our money supply has ballooned over the last 10 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 of
’02 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 10 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 the 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 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’d have thought that seldom mentioned Utah would be
the pioneer of such forward thinking?
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
