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The Bullion Report

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April 6, 2011 in 'The Bullion Report'

Challenging the FedChallenging the Fed

Gold and silver coins that are legal tender in the eyes of the government are now legal tender in Utah as lawmakers pass legislation to put an exclamation point on the issue. A redundant action? Perhaps, but on a deeper psychological level the legislation is widely seen as something far greater in scope than spending American Eagles for goods or services. The action in the Salt Lake state is seen as a potential challenge to the Federal Reserve, and its stance on inflation and monetary policies.


Past performance is not indicative of future results.

***chart courtesy of Gecko Software

As frequently observed by Ron Paul, precious metals have been recognized throughout history as a currency that satisfies the basic needs of exchange. Gold and silver were the predominant metals of currency, being portable and pretty difficult to counterfeit. They are easily recognizable, they tend to cross many national boundaries and they are not tied to a government or other body that can manipulate them at a pen stroke.   

The federal government actually recognizes gold and silver coins as legal tender, with just a few conditions. In this regard, legal tender refers to the potential for the coin (or currency) to be offered to settle debts and pay taxes. There was one stretch in history when gold bullion and coins were forbidden for non-numismatic purposes. Now it is permissible to privately own them and to use them for payment. Only United States coins and currency fall under this allowance. This applies to Federal Reserve notes or other national bank notes, per the United States Coinage Act of 1965. No one is required to accept either form of currency, but they are considered valid if offered. Foreign coins are not.

 

The tricky parts of the federal recognition and the new Utah legislation come in identifying the details of gold or silver coins as legal tender. The caveat for many of the US minted coins is that they are only legal tender for their face value. That means that a coin that weighs an ounce, but only has a face value of $50 can be legally tendered as…..$50. With gold trading above $1,400 an ounce, the idea of paying for anything with that coin seems ludicrous. But the suggestion is there, the opportunity for Utah to explore the potential of putting assets into gold or silver coins. In fact, several other states proposed some kind of radical push towards precious metals as payments, but most efforts to date have not been voted on.

Unfortunately, coins are seen as collectibles, so they are subject to capital gains tax. In part of a statement Ron Paul made in the House in 2009, he lauded the removal of such taxation, and sales taxes on the same. In other comments, he has likened the levy to the idea of charging sales tax on the conversion of quarters into dollars at a bank. This was especially pointed in his argument that the devaluing of the dollar resulted in more taxes on the gold or other precious metals.

Accepting gold or silver as legal tender is also mired in the issues of daily price fluctuations. But the big deal to many gold bugs isn’t the infeasibility of paying for anything with the coins. The greater issue appears to be the outright challenge to the current monetary policy of the Federal Reserve and recent comments from Ben Bernanke. Actively seeking an alternative to paper money, specifically Federal Reserve notes, is seen as a big billboard against the current devaluation of the dollar with particularly active stimulus efforts and quantitative easing programs.

Summary

The actions in Utah are likely just a lot of buzz, but just like the flap that ensued when the World Bank chief mentioned gold and reserves steps like these  definitely stokes the fires under engines that are trying to move towards “sound money” policies and a return to some semblance of a gold standard. Will people be buying gas with silver coins? Probably not today when the transaction would result in a loss, but the point still appears to be a statement against what some people see as a reduction in the perceived value and global importance of US dollars. There are a lot of mocking statements about the idea of someone trying to transact daily business in gold or silver in a place like, say, Walmart. The logistical concerns alone in terms of new equipment to weigh and assay bullion would negate any significant changes. Oh, and as far as anyone can tell reading the law, Utah capital gains taxes might not apply to the “currency” of gold and silver coins, but you can be assured that the Federal capital gains tax still does.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.