Gold’s Biggest Drop in 30 Years Fails to Deter Advocates

Photographer: Daniel Acker/Bloomberg

Gold-as-currency bills have passed the lower chambers of the legislatures in Missouri and South Carolina and a state House committee in Kansas. Bills also have been introduced in the current legislative session in Indiana, Oklahoma and Louisiana. Close

Gold-as-currency bills have passed the lower chambers of the legislatures in Missouri... Read More

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Photographer: Daniel Acker/Bloomberg

Gold-as-currency bills have passed the lower chambers of the legislatures in Missouri and South Carolina and a state House committee in Kansas. Bills also have been introduced in the current legislative session in Indiana, Oklahoma and Louisiana.

A drive to recognize gold and silver as legal currency, rather than trust in U.S. dollars, is forging ahead with bills in six states, even after gold lost 13 percent of its value over two trading days last month.

The gold-as-currency movement, fueled by distrust of federal monetary policy and concern that the dollar may be devalued, suffered a setback last week as Arizona Governor Jan Brewer vetoed a bill that would have made Arizona the second state to recognize gold and silver coins as legal tender.

Still, lawmakers in six other states are considering bills to monetize precious metals, and the drop in gold prices after 12 straight years of annual gains isn’t a major factor, said Rich Danker, project director for economics at the American Principles Project, which advocates for gold currency.

“I don’t see any cold water being thrown at this because of the collapse of gold prices,” Danker said in an interview. “People view gold as a storage of wealth. I don’t believe that diminishes when you have a price collapse. People have looked at gold as holding its purchasing power over time.”

Gold futures plunged 4.1 percent on the Comex in New York on April 12 and then 9.4 percent on the next trading day, the biggest decline since 1980. After touching a two-year low of $1,321.50 an ounce on April 16, prices have rebounded to close yesterday at $1,448.80. They are still down 14 percent this year and 23 percent from a closing high in 2011.

The bear market ended the appeal of a precious metal that soared to a record $1,923.70 in 2011 on demand for a hedge against Europe’s debt crisis and inflation spurred by government stimulus.

‘Administrative Burdens’

Brewer, a 68-year-old Republican, didn’t refer to the drop in a May 2 letter to lawmakers explaining her veto. The governor cited “administrative and fiscal burdens” of accepting gold and silver for payments, even as she agreed with concerns that the dollar could lose value due “as a result of an unsustainable federal deficit.”

“I believe the provisions in this legislation need to be more carefully examined and there should be prior coordination with those government agencies tasked with the oversight of these transactions,” Brewer said in the letter.

The move left Utah the only state to recognize precious metals as currency. The state’s lawmakers authorized bullion for currency in 2011.

Gold-as-currency bills have passed the lower chambers of the legislatures in Missouri and South Carolina and a state House committee in Kansas. Bills also have been introduced in the current legislative session in Indiana, Oklahoma and Louisiana.

Policy Discontent

As an expression of discontent with federal monetary policies, bills to recognize gold and silver as legal currency should be immune from fluctuations in prices, said Loren Gatch, who teaches political science at the University of Central Oklahoma, in Edmond

“Until there’s a real capitulation in gold, price changes won’t have much of an impact on the movement,” Gatch said by e- mail. “Gold has come down, but over the long run it’s still quite elevated. After all, it hovered between $300 and $400 for 20 years before it began its big move upward in 2005.”

U.S. Federal Reserve Chairman Ben S. Bernanke has kept overnight interest rates near zero since December 2008. The Fed has pledged to hold the benchmark near zero as long as U.S. unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

Fundamental Case

“The fundamental case for gold as currency is still intact,” said Jim Rickards, senior managing director at Tangent Capital Partners LLC in New York and author of “Currency Wars: The Making of the Next Global Crisis.”

“Gold is definitely volatile. Nothing changed on April 15 in a fundamental way. The question is, are you really going to be walking around with gold in your pocket and using that as currency?”

Even in Utah, the answer is still no. Treasurer Richard Ellis, a Republican, said Utah hasn’t set up a currency exchange for precious metals, nor are private vendors accepting gold or silver for payment. The drop in gold prices last month underscored the peril of accepting the commodity as currency, Ellis said by telephone.

“This has been my biggest concern -- when you take gold, even within a day, the price of gold changes, to say nothing of over time,” he said.

In Kansas, where the state House’s Taxation Committee approved a gold-as-currency measure, the hope is that enough other states follow suit to create a national exchange, said Richard Carlson, a Republican state representative and committee chairman.

“There could be a national money market to buy and sell gold and silver bullion based on current market rates,” he said by telephone. “It could be a good alternative investment for Kansans.”

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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