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Silver and Gold as Legal Tender?

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May 24, 2011 – Comments (7)

The AP is reporting that Utah has passed legislation making gold and silver coins legal currency.

Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.

This will probably be challenged since the constitution (Art. 1, Sec. 8) gives the power to coin money to congress.  A number of other states have introduce similar legislation, but Utah is first to pass it.

The other interesting item in the article is a plan for the Utah Gold and Silver Depository.  The idea is an account backed by gold that customers can access with something like a debit card.

The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings.

Details aren't provided, but I can imagine a business setup that wouldn't run in to the constitutional issue of coining money.  I'm speculating here since the article doesn't describe Franco's business model and I couldn't find a website for Utah Gold and Silver Depository.  Imagine something like an ETF.  An account holder deposits dollars (or possibly other currencies), gold or silver and gets a debit card.  Purchases could be charged to the card just like any other debit card.  When the charge hits the depository, they debit the account for the amount of gold or silver equivalent to the dollars.  Very similar to what happens when someone charges a purchase in another country and the bank converts the charge from that currency to the account currency.

The exchange rate mechanism, fee structure, etc. details would need to be ironed out before it could be rolled out, but I'm sure it could be done. 

And, since the charge on the debit card at a store is in dollars, the company hasn't created new legal tender.  The exchange from dollars to precious metal happens on the back end under some predetermined rate mechanism.

Food for thought.  

Fool on!

Russ

7 Comments – Post Your Own

#1) On May 25, 2011 at 12:17 AM, Starfirenv (< 20) wrote:

Maybe something like this-

http://www.goldmoney.com/online-payments.html 

Maybe Graley will chime in, seems to me he's mentioned using this system.   Best

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#2) On May 25, 2011 at 1:22 AM, TMFAleph1 (95.13) wrote:

For one, it would mean very small coins. Under Utah’s law, the value of the coins would reflect the gold (or silver) price. A troy ounce (roughly 31 grams) of gold is currently changing hands for more than $1,400. At that price, a gold coin worth a dollar would weigh all of 22 milligrams. That may be great news for microscope makers but it will be pretty fiddly for anyone hoping to buy a coffee in Salt Lake City. Of course, bigger coins could be used. But then even the change for a gunpowder-free headache pill would run to several suitcases of the worthless greenbacks Utah’s goldbugs so despise.

In Gold They Trust, Financial Times, March 25, 2011

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#3) On May 25, 2011 at 8:46 AM, devoish (98.36) wrote:

The other interesting item in the article is a plan for the Utah Gold and Silver Depository.  The idea is an account backed by gold that customers can access with something like a debit card.

 I imagine the service and management fees will be very low and none of the owners of this bank will think that they have earned the right to live high on the hog for helping you spend a useless metal you don't know what to do with now that the next new "investors" in this scam are petering out. Wouldn't it be exciting if it cost more to store and spend your "real" gold than your "paper" gold?

Gold has all the advantages of real estate, but so much better!

Best wishes,

Steven

 

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#4) On May 25, 2011 at 9:12 AM, bottomfisherman (33.21) wrote:

If people think just because they are going to get a state captial gains tax that this will apply to their federal taxes they are going to be in for a big surprise when the feds come after them for back taxes and or tax evasion.

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#5) On May 25, 2011 at 9:14 AM, bottomfisherman (33.21) wrote:

that was state captial gains tax cut. Under what I have read users of gold/silver would not have to pay a state capital gains tax on purchases.

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#6) On May 25, 2011 at 9:58 AM, rd80 (98.28) wrote:

Starfirenv - Thanks for the link.  That's probably very similar, if not identical, to what's planned for the Utah depository.  I was rambling and pulling the thread one step further to get to a system that would let someone pay at the store in dollars, but ultimately debit gold held on account.

Alex - Yep, even a silver coin valued on the bullion basis wouldn't be very practical for small transactions.  The system would either be limited to large values for the PM currency or need some kind of clearing house system that allowed accounting at the milli- or micro-gram level.

devoish - I don't know what kind of fee structure the guy setting this up has in mind.  I find it curious that a business that expects to launch on 1 Jun doesn't seem to have a presence on the web.  The company Starfirenv linked in the first comment charges a 1% transaction fee with a min and a max - not wildly out of line with credit/debit card transaction fees.  If I read correctly, that system is limited to transactions between accounts in the system.

I think there would be demand for a service like this, but I agree the fees would be higher than current transaction charges since the company would need to have the same or similar infrastructure as a credit/debit card system plus the fees associated with the PM transactions.

bottomfisherman - Thanks for pointing out the fed tax implications.  A system like this could be a nightmare at federal tax time since every purchase transaction could have an associated capital gain/loss on the PM side.

Thanks to all for the comments. 

Someone could get very close to this concept on their own right now.  Buy precious metals etfs in a brokerage account; use a credit card for purchases; then sell enough of the etfs each month to pay the credit card bill.  They would effectively be putting themselves on a gold, silver or whatever standard. 

To be clear, I am not encouraging or discouraging anyone from doing this - just pointing out that it can be done.  Anyone considering it should carefully review the market risks, tax consequences, etc.

 

 

 

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#7) On May 25, 2011 at 10:12 AM, Jbay76 (< 20) wrote:

It'll be interesting to see how this develops, and for how long it lasts, and the implications down the road.  Utah of all places...

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