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Will You Be Buying Groceries With Gold Soon?

The Arizona legislature last week tried to legalize shopping with gold and silver coins. Thankfully, Gov. Jan Brewer quickly put the kibosh on the idea, vetoing the law on Thursday. But even if she hadn't, it never would have worked.

I'm sorry. Did that statement sound a bit too matter-of-fact? Too dismissive of the gold bugs' idea of a "sound monetary policy"? Well, let's consider the evidence.

Bugs of a feather flock together
Arizona's proposed law was flawed from the get-go, because it fatally misunderstood the philosophy behind precious-metal investors. Stock investors sometimes buy gold stocks such as Yamana Gold (NYSE: AUY  ) or Goldcorp (NYSE: GG  ) in hopes they will rise in value, so they can cash out at a profit. (Although with Yamana shares down 13% so far this year, and Goldcorp down 21%, there have been precious few profits to cash out lately.) They're equally willing to trade one gold-mining stock with a high P/E (Goldcorp costs 16.5 times earnings for example, and Yamana more than 20) for a gold miner that looks cheaper than the competition -- for example, Newmont Mining (NYSE: NEM  ) , which costs only 10 times earnings.

People who buy actual precious metal -- or invest in it vicariously, through ETFs such as SPDR Gold Shares (NYSEMKT: GLD  ) or iShares Silver Trust (NYSEMKT: SLV  ) , which own actual ingots -- have a different motivation. They buy gold or silver because they think it's safer than cash. They're convinced the metal will hold value over time. More than that, they're convinced it will gain value over time. Hence, they're wholly uninterested in converting their gold or silver into cash, or, even worse, converting their gold and silver into orange juice and Oreos at the supermarket, as Arizona's law would have permitted.

Had Gov. Brewer signed Arizona's bill into law, Arizona would have joined Utah as the second state in the Union to permit use of gold and silver coins as currency. Colorado tried to follow suit last year, but the bill died in the state Senate, and several other states are said to be contemplating, or actually working on, similar legislation. But for now, the sole state in the nation that permits use of gold and silver as legal tender is Utah.

So how's that working out?

Recognizing that even with the law's passage, few Utahns would feel comfortable walking down the street, their pockets a-jingling full of gold and silver coins (muggers being one risk, holey pockets another), Utah came up with an alternative. Rather than literally paying for goods and services in gold coins, the state permitted the establishment of a depository -- the Utah Gold and Silver Depository -- where folks could deposit their precious-metal coinage, and bullion as well.

Deposits would be linked electronically to debit cards at UGSD, which account holders could then use to pay for goods and services with funds backed by their gold and silver -- funds that automatically translated the day's price for an ounce of gold, for example, times the amount of gold in an account, into a current gold-backed balance that could be paid out of the card.

Sound OK so far? Well, here's the problem: No one actually wanted these accounts.

What if they held a war against fiat currency, and nobody came?
Two years after Utah's gold-bug law passed, the UGSD website still bears this message, front and center on the homepage:

The Depository is dedicated to restoring the option of 'sound money' to the people of Utah.

While we are not yet opening new accounts, we are connecting with our future customers now.

Discover what the Utah Gold & Silver Deposiory [sic] offers, and pre-enroll for an account today.

It doesn't take a whole lot of between-the-lines reading to figure out what's going on with Utah's gold-coin law today. Two years after passage, the depository set up to put the law into practice is still trying to find someone -- anyone -- interested in taking advantage of it. Indeed, traffic to the site appears so light, and interest so little, that UGSD hasn't even bothered to run a spell-check on its main page and catch that little typo up above!

Fooled by gold
And little wonder. Over the past year, gold prices are down by more than 10% already. And anyone who took up Utah's generous offer in September, say, and made a deposit with UGSD then, would have found themselves 25% poorer by March.

That's hardly the kind of monetary stability that Utah's law seemed to promise. But it's precisely the kind of volatility that Arizona's law would have delivered, had the governor signed the law.

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Read/Post Comments (8) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2013, at 10:34 AM, regotoguy wrote:

    I agree we are not close to actually adopting gold or silver as a standard again. That being said the idea that States have positioned themselves to consider and in one case adopt gold/silver as legal tender is very scary. Many Americans no longer have faith in the USD. I have faith, but I'm no fool. The USD will continue to be accepted for many decades; however I doubt it remains the worlds currency. I also doubt it will retain its value. Only a fool believes that the USD will be worth more in 5 years. In time people will prefer gold or silver over the USD. States are positioning themselves for that day.

  • Report this Comment On May 05, 2013, at 12:59 PM, BJ52 wrote:

    The last thing I would want is a govenment agency knowing how gold and silver I possess. Putting assets in a state controled depository is foolish. You then become subject to their whims. Having gold and silver as an asset in a private stock is just that; a private stock. Its purpose, like stockpiling of food for use during economic bad times. This type of law is foolish. Banking has move beyond this. Banking has moved to electronic and plastic movement of assets. I haven't carried cash or bought a stamp to pay a bill in years. I have not had to balance an account in years because I have real time access to my accounts.

  • Report this Comment On May 05, 2013, at 1:25 PM, dapeck wrote:

    not having any, probably not.

  • Report this Comment On May 05, 2013, at 6:49 PM, automaticsteam wrote:

    From the US Mint website: "The Congress shall have the Power . . . To Coin Money."

    (Constitution of the United States, Article I, Section 8.)

    When the framers of the U.S. Constitution created a new government for their untried Republic, they realized the critical need for a respected monetary system. Soon after the Constitution's ratification, Secretary of the Treasury Alexander Hamilton personally prepared plans for a national Mint. On April 2, 1792, Congress passed The Coinage Act, which created the Mint and authorized construction of a Mint building in the nation's capitol, Philadelphia. This was the first federal building erected under the Constitution.

    President George Washington appointed Philadelphian David Rittenhouse, a leading American scientist, as the first Director of the Mint. Under Rittenhouse, the Mint produced its first circulating coins -- 11,178 copper cents, which were delivered in March 1793. Soon after, the Mint began issuing gold and silver coins as well. President Washington, who lived only a few blocks from the new Mint, is believed to have donated some of his own silver for minting."

    Well I guess that "need for a respected monetary system" is out the window...

    Yuans, anyone?

  • Report this Comment On May 05, 2013, at 9:35 PM, savage393 wrote:

    Since the price of gold world wide is always in USD, the change in it's value will not be a problem, internationally. Because it ids now considered a commodity, the value of it changes from day to day. Using it as a medium of exchange for goods and services will always be chancy, unless the price becomes fixed again like back in the 30's. Imagine selling your car for two one ounce coins, thinking they are worth say $1700 each. Then to find out that later that day the price went to hell, and your two coins are now only worth $1300 each. You just got the green weenie. Any and all transactions in gold or silver would always to subject to this problem. One the other hand you could make money if the exchange goes the other way. You got to take your chances.

  • Report this Comment On May 05, 2013, at 10:50 PM, freedomworks wrote:

    You might consider doing a tad more research before you spout off out of ignorance.

    When the bill first passed, I picked up my phone and CALLED the bill's author, and then the UGSD's founder. Something the author of this article could not find the time to do.

    I learned:

    1. Setting the stage for the use of gold and silver in Utah is in ANTICIPATION of the dollar becoming worthless once it ceases to be the world's reserve currency (toward which goal China is working steadily - google it). It's taking them several years to get all their ducks in a row - something that will be more difficult for Arizona or any other state to do AFTER the dollar becomes worthless. It's a lot like waiting until after flood washes away your house to shore up your foundation. Good luck with that, AZ.

    2. The Utah Gold & Silver Depository is NOT functional yet, so naturally, they don't have customers. (Bad form to sell something you can't deliver on yet). They're still trying to work out the logistics on the debit card. Since they are the first to do this, there are plenty of roadblocks.

    3. "No one actually wanted these accounts." Written out of sheer ignorance. The alternative currency movement is strong and growing. Only [Motley] fools dance while the winter storms brews on the horizon.

  • Report this Comment On May 06, 2013, at 2:40 AM, Pragmatist76 wrote:

    Meanwhile another indicator of general loss of faith in fiat currency.

    This is reaching disturbing proportions

  • Report this Comment On May 07, 2013, at 12:32 PM, Mouser79 wrote:

    Bad money chases away the good why use gold when the store will take poopoo cash

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