How low can gold prices go? Has the rebound arrived?

On April 15th, the price of gold dropped $140 in one day when Goldman Sachs drastically reduced its average price forecasts and recommended a short Comex gold position for their clients. Things have been shaky ever since.

Introduction

For many years, people have relied on gold as being a stable and worthwhile investment in an otherwise constantly fluctuating market. Back on Sept. 5th of 2011, gold reached an all-time high of $1,900.30 per ounce and was considered a mandatory component in every investor’s portfolio. Unfortunately, it dropped drastically to $1,690 the following year and is currently being sold at only $1,340 an ounce. The price of gold has been dropping quickly since it hit its peak two years ago, but most investors are more interested in the question: How far will it fall before it starts to rebound again?

Gold Fell to $1380 in Mid-April

On April 15th, the price of gold dropped $140 in one day when Goldman Sachs drastically reduced its average price forecasts and recommended a short Comex gold position for their clients. This immediately brought the price down to $1395 per ounce, which dropped even further the following day to $1380. Fortunately, less than two weeks later, Goldman Sachs decided it was time to close out the gold shorts that were previously recommended and the price of gold has been wobbling between $1,200 and $1,400 an ounce since.

Lower Price Expectations for Gold

The recent collapse in gold prices, however, caused the UBS investment bank to downgrade its price expectations for all precious metals. Gold has displayed great resilience at these lower levels in the past, which has prompted several long-term holders to actually add to positions. There are also some strong signals of converting ETFs and metal accounts into allocated holdings. For additional information on the views of the UBS in regards to the decline in gold prices; please read “Gold market needs time to heal.”

Gold Should Go Up from Here

Forecasted gold prices for the end of the year range between $1,480 and $1,700 per ounce. HSBC has the most optimistic estimate for the year at $1,700, and Mitul Kotecha (Credit Agricole’s head of foreign exchange strategy) is predicting that gold will finish the year at $1,480 and drop to $1,318 in 2014. Most experts feel gold has dropped as low as it will go in the near future, and a MarketWatch survey of ten different forecasts shows that all predictions for the average price in 2013 are higher than its current price. In the same survey, over a half of the 2014 price predictions are also above the current price of gold.

Although gold is down almost 25% since it reached its peak in 2011, there are several indicators that it won’t drop much further. It has been rebounding the last few weeks and should continue on an upward trend for the remainder of 2013. It may drop back down again in 2014, but not as low as it reached in the middle of April.

When will inflation hit the U.S.? 2013?

When we’re going to see the serious inflation – and perhaps even hyperinflation – that economists have been predicting?

The price of gold, oil, energy and other hard commodities has risen steadily for more than a decade, and that can only mean one thing: global currencies are weakening and inflation has settled in. The real question, though, is when we’re going to see the serious inflation that economists have been predicting?

To answer that, we’ve got to do some data mining. First: what’s the current inflation rate? According to the U.S. government, it’s a paltry 1.7 percent. Ask anyone who goes grocery shopping or pays household energy bills and they’ll probably shake their heads at that number.

In fact, if we calculate inflation the way the government did in 1989, we’d see inflation’s actually hovering at an annualized rate of 5 percent (per ShadowStats). If we calculated inflation the way our own government did in 1980, we’d see it’s even worse at somewhere north of 8 percent (again per ShadowStats).

Those are scary numbers. And they’re indicative of just how fragile our so-called recovery has been. And yet, most investors – and particularly the media – are happy to get spoon-fed the more palatable modified inflation numbers that get announced every month. It’s just a matter of time before that changes.

When will inflation get worse?

Inflation’s already bad, but it’s probably just a glimmer of how bad it will ultimately get in the U.S. Unfortunately, we don’t have a roadmap that spells out exactly when the bottom will drop out, but we can take educated guesses.

Right now, the U.S. dollar is artificially propped up thanks to the fact that it’s in better shape than some of its neighbors. The EU is worse off than the US, China’s yuan is pegged to the dollar, India’s got official inflation numbers north of 7 percent and inflation’s ravaging South America. Since the U.S. is printing money at will, that gives central banks around the world little incentive not to do the same. In fact, other economies get penalized if their currency stays strong relative to the dollar and Euro because their exports effectively cost more.

That’s created a race among central banks, with each of them trying to devalue their currencies faster than their neighbors.

The U.S. is doing particularly well at devaluing the dollar. Yes, the government can say that unemployment is under 8 percent, and that our budget will be balanced in a decade, but the facts just don’t support those claims. We think we’re insulated from riots, draconian budget cuts and hyperinflation, but I would argue we’re just a black swan away from a bout of hyperinflation in the U.S.

And that black swan would be a sudden rise in interest rates that the government is forced to pay on bonds. At the moment, interest rates on bonds are unnaturally low. That’s thanks to investor uncertainty and the Federal Reserve’s bond buying spree (known as quantitative easing). Yields on bonds are so low they’ve crumpled 50 percent over the past decade and more than 70 percent over the past 20 years.

We truly are at a pivot point. The U.S. debt load threatens to collapse the economy, and if investors lose faith in the U.S. government’s ability to pay back it’s bonds, the U.S. national debt could transform itself from a heavy burden into a crippling death blow. That’s no exaggeration, either. The same thing, in fact, happened in Ireland, Greece and Spain. How? Investors stopped buying bonds and the rates those governments had to pay to borrow cash skyrocketed.

It can’t happen here

Surely Greece is in worse shape than the U.S., right? In fact, the U.S. has surpassed Greece’s debt-to-GDP ratio (per GlobalFinance), and Italy’s debt-to-GDP is only about 16 percent higher than the U.S. government’s. Should investors stop buying bonds, the U.S. would have to sell them at ever higher interest rates with each tick up in rates further burdening the ability for our economy to “grow it’s way out” of debt.

Since most of Europe shares a currency in the Euro, countries in the EU don’t have the luxury of cranking up the printing presses at will. The U.S. on the other hand, does, and when investors stop dumping money into U.S. treasuries (which they eventually will), the U.S. will be forced to print money even faster than they are right now.

When that comes, we’ll finally see the rampant inflation that everyone’s afraid.

Will it happen in 2013?

The short answer is, I’m not sure. The long answer is, it’ll probably happen when conditions start improving in Europe. The Euro is in bad shape right now, but the fact that it’s tied together a diverse group of countries means the EU can exert pressure on troubled countries, forcing them to cut their budgets and get on a more sustainable fiscal path.

We can’t say the same thing about the dollar, and that means our government’s going to be reluctant to make the hard cuts it has to make. Without those cuts, the only choice the Fed will have is to print even more than the $85 billion a month that it’s already printing. Once that happens, we’ll really understand what it’s like to live in an economy rampant with inflation – no matter what numbers the government throws at us.

Related

How to invest in thoroughbred horses and other racehorses

From betting online to buying stock in horse racing track operator or buying your own horse, there are lots of ways to invest in thoroughbred horses.

Investing in racehorses requires a level of commitment that chases away most amateurs. But, no matter what your level of interest, there are ways to get involved in the Sport of Kings. Here are a handful:

1) Bet at the track or online. The simplest way is to head to the nearest racetrack, buy a race card and place your bets in person. Typically, you’ll be able to bet on live minor league races that take place at your local track, or you can bet on national races (which are shown on TVs at the track) via simulcast. It’s also legal to bet on horses online in more than a dozen states including California. Some of the leading online horse betting sites include TVG.com, Twin Spires and The Racing Channel.

2) Invest in horse racing-related stocks. There are lot of companies that promise exposure to horse racing – namely through the companies that operate horse racing tracks. One of my favorites is Churchill Downs, Inc. (NASDAQ:CHDN), which runs the Kentucky Derby and recently reported record revenue on the strength on surging growth in its online betting service (at TwinSpires.com). Other horse racing-related stocks include Penn National Gaming, Inc (NASDAQ:PENN) and MTR Gaming Group, Inc. (NASDAQ:MNTG).

3) Buy a horse. Thoroughbreds are bred to do one thing: race. To even buy one, you need to register and be approved as a thoroughbred owner in your state. Once you’re approved, you’ll need to pay annual dues to your state thoroughbred owners association. In exchange, you’ll get the opportunity to bid on thoroughbreds at auction. Once you have one, you can expect to pay about $1000 per month in food and maintenance. On top of that, training costs will start around $2,000 a month on the low end (per Stanley Barton at Seeking Alpha). Investing in quarterhorses is cheaper but the payout is smaller and so is the number of tracks that host quarterhorse racing.

4) “Claim” a horse. One of the ways horse tracks try to ensure that races are fair is by forcing owners to set a “claim” price for their horses. About half of all horse races have a “claim price” a horse owner must agree to before entering his or her horse in a race. If the claim price is, say, $20,000, that means the owner of that horse is legally obligated to sell the horse to any buyer for $20,000 before the start of the race.

“About half of all races at North American tracks are claiming races,” Barton writes. “The claiming price can range from as low as $2,000 to hundreds of thousands, although the majority are between $5,000 and $50,000.”

Interestingly, you must “claim” a horse before the race. If the horse wins, the proceeds go to the current owner, then you get to take the horse home for what you hope will be a bright future full of more racing.

5) Enter a thoroughbred partnerships. Horse ownership partnerships provide a unique way of distributing the high cost of owning and racing a horse. Team Valor is one company among many that offers investors an opportunity to buy an ownership stake in a horse. Team Valor also produced the 2011 Kentucky Derby winner Animal Kingdom. According to the site’s Q&As, the average cost to go in on a horse goes “from a low of $6,000, with a median of $12,500 and as high as $75,000 to $100,000.” Should the horse win a purse, you’ll split the winnings between the six and 12 other investors in the horse.

Horse racing is called the Sport of Kings because it’s anything but cheap. If you genuinely have a love for the sport, though, it’s rewarding even without the prospect of financial gain. Every dollar you earn after that is icing on the cake – and, if you find the right horse – it might make for a lot of icing.

One of the most famous racehorses of all time, Secretariat, brought in more than $145 million in winnings and stud fees starting in 1973. Seattle Slew is estimated to have made north of $200 million at stud after being sold at auction for a mere $17,500, according to Barton. That’s the stuff of legend, and it’s part of what makes investing in horses so tantalizing. Just remember that whether you wind up with a winner or loser, the costs to get your horse to the track are very real.

Horse photo by Danagouws.

Related

UNCOVER THE NEXT MINING GIANT


The Top 500 Gold and Silver Mining Stocks


ARE THEIR HEADS IN THE CLOUDS?


How realistic is $5,000 gold?


SEEING WHITE IN THE FUTURE

Silver prices setting up for 30-year high?


A JOLT TO THE SYSTEM


Five reasons Ben Bernanke hates the gold standard


A BRAND NEW KING


Who is the world’s largest silver producer?


ESCAPE THE CUBICLE, BEFORE YOU’VE GOTTEN THERE


How to earn $100,000 at age 15


Why you should never, ever buy silver coins from the Franklin Mint

I was content to endure the Franklin Mint’s ads without considering the impact they have on consumers – until now…

Consider this my public service announcement for the week. You can boil it down to one commandment: “Don’t buy silver coins from the Franklin Mint.” Or – to make it simpler – “Don’t buy anything from the Franklin Mint.”

Fortunately, I don’t speak from experience, but I have seen the Mint’s ads on television and in magazines. They’re memorable in part because the company makes such a desperate attempt to look and sound like they represent the U.S. government without actually having a thing to do with the government. It’s almost like playing “Where’s Waldo?” Instead of searching for Waldo, though, you’re frantically searching for their disclaimer.

Still, I was content to endure their ads without considering the impact they might have on unwitting consumers until I read a recent Q&A in the Chicago Sun-Times titled “‘You’ve been snookered’ on silver coins purchase.”

In the article, a man who identifies himself as “DA in Troy, Mich.,” writes the paper in desperate need of help. He spent the past 25 years gobbling up “$47,000 in collectable silver coins and beautiful non silver coins from the Franklin Mint for my retirement.”

He did it because he thought “the scarcity and limited edition minting of these coins would drive up their value over the years and because I believed the silver content in the silver coins would also increase in value.” Now, he’s on the brink of retirement, and when he looked into selling the coins to a dealer, got offered $2,500 for the lot.

“DA in Troy” wouldn’t have even gotten offered that much if not for the fact that some of the coins he bought actually had silver in them.

“I don’t know of a single item produced by the Franklin Mint that can be sold today for its original cost,” financial columnist Malcolm Berko wrote in response to DA’s questions. “You overpaid for those coins by orders of magnitude. And you probably paid five or six times the value of the silver content for the silver coins you purchased. So while sliver has tripled in price since 1984, the silver value of those coins is still way less than your cost.”

As for the non-silver coins, Mr. Berko recommends that DA try selling them on eBay where he might get $100. It’s a sad story that reinforces one of our constant themes on this site: always do your own due diligence before making any investment decision. Reading a single blog post (even one of ours) and making a snap purchase of stocks or coins is a fast way to lose your hard-earned cash.

If you’re truly interested in investing in silver coins as a safe haven against an economic meltdown, I’d recommend Silver American Eagles (as sold by the U.S. Mint) or junk silver (pre-1965 U.S. quarters that contain 95 percent silver). Because both are quickly and easily verified as real silver, they’re easy to sell. You’ll pay a slight premium over “spot silver prices,” but at least you can rest assured you won’t end up with a drawer full of junk.

Related

How realistic is $5,000 gold?

The way I view it, there are two scenarios that could push gold prices up to $5,000 an ounce: 1) A slow and steady upward rise in metal prices as governments continue devaluing their currencies; or 2) a…

The way I view it, there are two scenarios that could push gold prices up to $5,000 an ounce: 1) A slow and steady upward rise in metal prices as governments continue devaluing their currencies; or 2) a panic-fueled scramble out of just about every asset class outside of precious metals and tangible assets.

The first option is looking increasingly unlikely. “From what we know about commodity cycles going back into the 1700s, the average bull cycle lasts about 17 years,” John E. LaForge (who heads up Ned Davis Research’s Commodity Team) said in a recent interview with Mineweb. “This commodity cycle has now gone 11 years. Typically the first 10 years of those cycles is when a lot of that easy money is made. That’s when things like gold go up seven times from $250/oz to $1,700/oz. If gold increased seven times from $1,600-1,700/oz, that would equate to $10,000/oz. To get another seven-fold increase from here would be tough.”

Indeed, major investment firms have started paring back their 2012 and 2013 forecasts on gold prices. Citigroup, for instance, forecasts the metal hitting $1,718 an ounce in 2012 and $1,835 an ounce in 2013 – that’s 4 percent less than their last 2013 forecast per Marketwatch.

By 2014, analysts are expecting the Federal Reserve to start closing the spigot on the easy money we’ve been enjoying. Once interest rates start climbing, the dollar should rise and gold prices would likely taper off. Silver will be hit even harder in that scenario, Citi says (see our post: Why Citi says investors should stay away from silver).

As a slow and steady rise toward $5,000 an ounce gold looks increasingly unlikely, that leaves just one other scenario that could push us there: a black swan – some unexpected Lehman Brothers-style collapse or sovereign default that sucker-punches the global economy and leaves investors running for the hills.

There are plenty of candidates that could lead to an investor panic:

  • A breakup or re-organization of the Eurozone
  • A sovereign default in Europe, Asia or elsewhere
  • A sudden spike in bond yields in the U.S. – meaning investors start losing confidence in the U.S. government’s ability to pay back its debt
  • The collapse of a major international bank

“As more and more of this money is printed everywhere, not just in the U.S. but also in the Eurozone, Japan, China and elsewhere, there’s going to be a realization sometime in the next three to five years that maybe the $20 sitting in a pocket isn’t worth what it used to be,” LaForge says. “How do I protect myself? People are going to start looking more toward hard assets. Gold is one of those. Land could be another one. But gold is clearly something you can pick up and move.”

No one wants to see an economic collapse, but pretending warning signs (i.e. the threat of default in Italy, Spain or Greece) aren’t out there is exactly how we could end up with one. If the U.S. government and other governments around the world can restrain spending, $5,000 gold will probably remain one of those mythical, pie-in-the-sky numbers that we never see.

The problem is, governments have trouble reigning in their spending when there’s absolutely nothing backing up their currencies. That makes me think an economic calamity is possible in the coming years. I don’t necessarily see it leading to $5,000 gold (although $2,500 gold definitely looks possible). I do, however, expect to see the emergence of a global, gold-backed currency – one that holds governments and banks alike accountable for their spending.

Related

A new way to invest in private companies with CircleUp

A new way of investing: CircleUp could prove to be the leader in crowdfunding if the SEC gives it its blessing.

It’s tantalizing to imagine getting shares in a start-up that might go on to become the next Google. That’s part of what draws us to sites like Kickstarter.com where everyday people can pledge cash investments in start-up projects in exchange for recognition and swag.

Still, it’d be nice to get more than swag for laying hard-earned cash on the line. That’s the idea behind crowdfunding – fundraising for private companies in exchange for a stake in the company. Unfortunately, wide-scale crowdfunding is yet to materialize due to complex regulatory issues set by the SEC and other securities agencies.

At the moment, investing in private businesses is limited to what the SEC calls “accredited investors.” That includes banks, investment companies and wealthy investors. The idea is that since private companies don’t have to publicly disclose their earnings information, retail investors could get duped into dumping cash into a bottomless pit. By setting rules for accredited investors, the SEC limits investing in private companies to savvier investors and institutions since they should be more familiar with the unique risks that start-ups bring.

Whether or not that’s true, it seems like the onus should be on the buyer, not the government to tell us what we can and can’t investment in. Passage of the JOBS Act has crowdfunding fans hopeful things are about to change, too.

And there’s one company in particular that’s leading the charge: CircleUp.com. CircleUp vets consumer and retail start-ups that are looking to raise up to $1 million. If that start-up meets CircleUp’s criteria and has $1 to $5 million a year in revenue, CircleUp opens up investment opportunities in that company.

Right now, CircleUp is limited to accredited investors, but “the site may open to unaccredited investors,” per reports from AllThingsDigital. Expect a big surge in interest if that happens.

CircleUp’s model differs from that of competitors like SharesPost and SecondMarket in that it limits offerings to companies that are actually generating revenue. Companies listed on SharesPost and SecondMarket might not have made a dime in the past, and perhaps they won’t ever generate cash in the future.

“Private investments in small businesses are the next step in the evolution that began fifteen years ago with simple consumer transactions on eBay, and have continued with very personal matchmaking for housing and dating on sites like Craigslist and financial transactions through investment brokerage firms and online banking,” CircleUp said in a recent statement.

Gartner Research estimates that crowdfunding will be a $6.2 billion market by 2013. If things go well, expect CircleUp to capture a fair chunk of that pie.

Related

Say hello to the catalysts that could push gold prices up overnight

From Euro woes to India taxes, here are three triggers that could push gold up in a hurry.

Gold prices have fallen slowly and steadily since the end of February, and that’s got some commentators arguing that it could be the beginning of the end for the yellow metal (see our post 3 signs investors are fleeing gold for more). That said, the price of gold is anything if not volatile.

Gold prices are so volatile, in fact, Barclays Capital’s Maneesh Deshpande is telling investors to trade volatility in gold prices rather than the metal itself (per Barron’s). In spite of that, Deshpande and several co-authors of a recent research report from Barclays have identified what they call catalysts for a rapid upswing in gold prices. Among them:

1) A Euro hangover. Should another wave of panic sweep across the Euro-zone, look for investors to pour into gold. The authors of the report do point out that the correlation between problems with the Euro and higher gold prices is tenuous at best. If a country were to be forced out of the Euro-zone or were to go into default, though, we suspect that gold prices could spike significantly.

2) A thumbs up from the Indian government. One of the less visible reasons we’ve seen languishing gold prices is India’s recent tax increase on gold imports. The government doubled import dues from 2 percent to 4 percent. That’s putting strain on the the Indian gold market, and India remains the world’s largest consumer of gold jewelry. Should the government change its mind on the new tax, gold prices could catapult higher. While Barclays feels a repeal of the tax hike is unlikely, they do point out that India’s parliament could consider modifying import rules (via its finance bill) on May 7. Whatever the outcome, gold prices could get volatile in the run-up to the decision.

3) Economic changes in the U.S. Should the economic picture in the U.S. grow cloudy, or worries over inflation crop up again, gold prices would be the biggest beneficiary. The presidential election in the fall could catalyze the Federal Reserve to take action via monetary easing if the economy shows signs of weakness. Monetary easing (or even the expectation of it) generally leads to higher gold prices as expectations of inflation grow.

Some commentators believe a new round of quantitative easing is imminent. “Bernanke will do everything in his power to make Obama look good to get re-elected,” says Chris Marchese, a contributor to The Morgan Report. Marchese is so confident this will happen, he’s predicted silver prices could spike as high as $70 an ounce this fall (nearly double where it’s at today). If silver prices do that, you can bet gold prices won’t be sitting still either.

Related

How to earn $100,000 at age 15

Gumroad’s founder isn’t shy. And that’s part of what’s so fascinating about him. He could have stayed at Pinboard and perhaps gotten rich in the process. Instead, he walked away to found his own start-up.

I’m not sure which is better: earning $100,000 by age 15 or having a story written about you titled “The Most Interesting Teenager In Silicon Valley.” Sahil Lavingia’s done both. The 19 year old was on the team that helped launch Pinterest (the fastest-growing Web site of all time).

Before that, he was a 15-year-old kid designing iPhone apps on the weekends and selling them on Flippa.com.

“I built a to-do list app,” Lavingia said in an interview with Alyson Shontell. “I built this thing that let you create Facebook walls but for Twitter before Twitter had any kind of conversation aspect. I built this tool that let users send automatic, customized direct messages on Twitter.”

He contracted out the coding work, then sold the apps for $1,000+. Things accelerated when Lavingia took up iPhone app development. He says he leaned how to build Apple apps in two weeks thanks to Stanford videos.

“I was financially independent when I was 15,” Lavingia said. “I never really tell anyone that because it doesn’t feel relevant, but looking back I think, Oh, starting a company might have actually made sense. I have been doing okay for a while. My bank account when I was 15 or 16 was over $100,000.”

Lavingia’s clearly not shy. And that’s part of what’s so fascinating about him. Sure, he could have stayed at Pinboard and perhaps gotten rich in the process. Instead, he walked away to found his own start-up: an online payment processing site called Gumroad.

Gumroad officially launched on Feb. 8, 2012, and it did so thanks in part to $1.1 million in seed money from a number of venture capitalists including the heavyweight VC firm Accel Partners.

Why all the hype for Gumroad?

Gumroad has one over-riding goal: making it easy to buy and sell things online. It does that by giving sellers a simple form to fill out. After hitting submit, the seller than gets a link to share with others who want to buy a particular product.

“Lavingia thinks that Facebook and Twitter can become the new marketplace/store-front and thus, in his view, Gumroad has the potential to be a huge sustainable (even billion dollar) company,” writes Alexia Tsotsis at Techcrunch. “Gumroad obviously disrupts the traditional and current online distribution systems, allowing artists with massive Twitter followings like Kanye and Gaga to sell directly to their followers, for example.”

If Gumroad pans out, it could open the world of online sales to a whole new audience – and help transform commerce on the Web in the process.

Related

The world’s ugliest million dollar penny?

We’ll admit the story behind the headline-fetching Miss Liberty penny is interesting, but we won’t concede that it’s a beautiful coin.

OK. We’ll admit the story behind the headline-fetching Miss Liberty penny (pictured to the left) is cool, but we can’t concede that it’s a beautiful coin. I’d probably go as far as to say it’s the ugliest million-dollar coin I’ve ever seen. In case you hadn’t heard, the 1792 Silver Center Cent (as it’s officially called) sold for $1,150,000 on Thursday, April 19, 2012, at the Renaissance Schaumburg Convention Center Hotel near Chicago.

Historically, there have only been about 25 coins that have sold for more than $1 million. What makes the Miss Liberty so valuable?

“After 200 years, we can only account for 14 of these,” Todd Imhof of Heritage Auction Galleries, the company that sold the penny, told the Chicago Tribune. That’s because the coins never actually went into circulation.

The experimental silver center cents were produced shortly after the Mint was established by George Washington in 1792. To prevent counterfeiting, Thomas Jefferson suggested the Mint not make pure copper coins, but instead make copper coins with a small silver plug in the center. The silver plug (which is visible on the Miss Liberty pictured above) would add intrinsic value to the coin and make it tough to duplicate.

Unfortunately, even the Mint had trouble producing the bi-metallic coins, and they eventually opted to issue 100-percent copper coins to the public. That explains why the experimental Miss Liberty coins are so rare and coveted. Ugly or not, that makes one of these coins in good condition worth a million dollars.

Apparently, discussions about the world’s ugliest coins are fairly common. There’s at least one forum dedicated to discussing ugly coins. It doesn’t look like the Miss Liberty’s come up, but I suspect it will eventually.

Related

It’s law: Gold and silver approved as currency in Utah

You can now use gold and silver as legal tender in Utah. Here’s how it works.

Three weeks ago, Utah quietly became the first state to recognize gold and silver as an alternative currency. Utah Governor Gary Herbert signed House Bill 157 along with 37 other bills on March 27, 2012. Here’s what HB 157 does:

First, you can’t expect to use your Canadian Maple Leafs or Chinese Pandas as legal tender. Utah’s bill identifies exactly what types of gold and silver the state will accept as legal tender, and that’s only “gold or silver coin that is issued by the United States.” Utah calls U.S.-issued gold and silver coins, “specie legal tender.”

Line 72 in the bill states “Specie legal tender is legal tender in the state.” That means gold and silver coins are exempt from sales and use taxes, and it allows for a tax credit when exchanging “one form of legal tender for another form of legal tender.”

Now, Utah gold and silver investors won’t have to pay capital gains taxes when they sell their gold and silver for paper money (even if they’ve made a substantial profit). Of course, investors will still owe the Federal government capital gains, but at least Utah’s holding out a small umbrella for gold and silver investors.

There are some tricky issues that crop up when paying in gold and silver. What happens, for instance, if you want to mail a Silver Eagle as payment for goods and the spot price of silver drops 5 percent while your coin is in the mail? If we extend the logic in the bill, that shouldn’t matter because the amount of gold or silver due at the time of the sale (as determined by using London spot prices) will stay the same. If silver drops shortly after you’ve made a purchase using the silver, the seller’s the one “taking a loss.”

The bill addresses this issue in the context of paying taxes. Should the state of Utah decide it wants to tax specie legal tender, it lays out how the process would work. Namely, the seller would need to note:

  • The purchase price in specie legal tender
  • The amount of tax due
  • The tax rate
  • The date of the transaction
  • The most recent London fixing price

It creates some extra paperwork for sellers, but I imagine the people who don’t trust paper money are just fine with that. Utah’s paving the way for other states to follow suit (specifically it looks like Missouri might be next). The real kicker would be if we could get the Federal government on board. But, if we somehow get to that point, I suspect Congress will have bigger fish to fry – things like riots and bread lines.

Related