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NEW YORK (CNNMoney) — A growing number of states are seeking shiny new currencies made of silver and gold.
Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.
“In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System … the State’s governmental finances and private economy will be thrown into chaos,” said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.
Unlike individual communities, which are allowed to create their own currency — as long as it is easily distinguishable from U.S. dollars — the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”
To the state legislators who are proposing state-issued currencies, that means gold and silver are fair game, said Edwin Vieira, an alternative currency proponent and attorney specializing in Constitutional law. And since gold has grown exponentially more valuable, while the U.S. dollar continues to lose ground, the notion has become increasingly appealing to state lawmakers, he said.
The state gold rush: Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.
Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness.
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“A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C.
South Carolina Republican Representative Mike Pitts proposed a currency system that would allow people to use any kind of silver or gold coin — whether it’s a Philippine Peso or a South African Krugerrand — based on weight and fineness. Pitts said in the bill, which currently has 12 co-sponsors, that the state is facing “an economic crisis of severe magnitude.”
Republican representatives from Washington State followed suit in January, introducing a bill that would also allow any gold and silver coins to be considered legal tender based on metal values. Minnesota, Iowa, Georgia, Idaho and Indiana are also considering similar proposals.
Many of the bills would make it possible for residents to exchange the physical coins for goods and services, so you could use coins to buy anything from groceries to a car as long as the store chooses to accept them.
However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins — especially if they come from different parts of the globe and are of different sizes and shapes — will get tricky.
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It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said.
Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals.
Before deciding on a specific form of currency, some states — including Minnesota, Tennessee, Virginia and North Carolina — are considering proposals that would first require a committee to review their alternative currency plan.
The future of U.S. currency: The states’ proposals have been gaining steam among Tea Partyers and Republicans, many of whom also endorse a nationwide return to the gold standard, which would require the U.S. dollar to be backed by gold reserves.
Tea Party “father” Ron Paul is sponsoring the “Free Competition in Currency Act,” which would allow states to introduce their own currencies, and rival Newt Gingrich is calling for a commission to look at how the country can get back to the gold standard.
But it will be the individual states that could really get the ball rolling, said Vieira. Even if several of the current proposals get killed, the introduction of so many bills at the state level is drawing national attention to the issue, he said.
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Of all the state proposals circulating right now, Republican-controlled states including South Carolina, Georgia, Idaho and Indiana have the best chance of passing their proposed bills this year, said American Principles Project’s Danker. If just one or two states implement an alternative currency, it could have a Domino effect, he said.
“I think we could get a couple passed in this legislative session, and that would show this is mainstream, popular and it would be a justification for more of the risk-averse states for doing this,” he said.
There are, of course, many people who think the recent push for alternative state currencies should be stopped in its tracks. David Parsley, a professor of economics and finance at Vanderbilt University, said he thinks state-issued currencies are a “terrible” idea.
“Having 50 Feds” could debase the U.S. dollar and even potentially lead the country into default, he said. “The single currency in the United States is working just fine,” said Parsley. “I have no idea why anyone would want to destroy something so successful — unless they actually wanted to destroy the country.”
By Blake Ellis @CNNMoney
The following is a guest post by Lawrence Carrel, author of “ETFs for the Long Run” and “Dividend Stocks for Dummies.” The opinions expressed are his own. Full disclosure: The author has had 7 percent of his personal retirement account in a gold ETF for the past four years.
When the price of gold plunged 20 percent last month, many market watchers declared the gold boom over. Stalled, yes; ended, no, according to many gold analysts, who believe the precious metal may instead be near a new sustained rally.
“I can tell investors don’t sell off your gold,” says Martin Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads here.”
During the summer, gold surged 29 percent to a record high of $1,920 a troy ounce. This jump caused the price to drastically detach from its 200-day moving average, an important trend line in technical analysis that the gold price had closely hugged for much of the last decade. Technical analysts considered this jump unsustainable and in September gold gave back most of these gains.
Gold fell to a low of $1,534.49, much to the technicians delight, and it bounced off the 200-day moving average’s support level of $1,527. While most gold watchers expect the metal to experience turbulence during the next few months, the world hasn’t changed much, and gold prices may climb higher because of its status as a safe-haven during turbulent times.
“Have the countries around the world solved the debt crisis?” asks Nick Barisheff, president of Bullion Management Group, a precious metals investment company based in Toronto. “Have the bailouts ended? Have their currencies stopped tanking?“ With the world already worried about Greece’s fiscal problems, gold summer’s rally was sparked by fears that the U.S. might default on its debt.
After Standard & Poor’s downgraded the U.S. debt, investors flocked to gold as one of the few safe havens left. This raised the specter of recession, which is never good for gold. The combination of increased collateral requirements for trading with falling commodity and stock markets, gold tumbled as investors sold it for liquidity amidst a flurry of margin calls.
Still many analysts think the gold market isn’t in a bubble and that the run-up is far from over. Analysts say a bubble is when an asset goes up exponentially 15 to 20 times.
Gold is up seven times during the last decade. Since its low on Sept.26, 2011, gold has jumped 9 percent. Most analysts expect the price to retest September’s low during the next few months. If it bounces again that would be the buy signal.
Ed Carlson, Chief Market Technician at Seattle Technical Advisors.com says gold could fall as far at $1,460. But even Carlson predicts a new sustained advance will begin after Thanksgiving.
The fundamental factors for being bullish are also compelling. Low interest rates are very good for gold. In August, the Federal Reserve promised to keep rates low for the next two years. Additionally, most analysts expect the European Central Bank (ECB) to stem the European debt crisis with a flood of new money.
“The relationship between gold and world liquidity is very direct,” says Murenbeeld. “If countries print money gold goes up.” Murenbeeld says there is a high probability that the ECB and the European System of Financial Supervisors (ESFS) will insert a significant amount of money into the system, anywhere from 1 trillion euros to 2 trillion euros.
“This liquidity will stabilize the banking sector so that it can withstand a default from Greece and speculation of default from other countries. All that plays into the hands of gold.” Murenbeeld recommends investors use a dollar cost averaging strategy here. “When they do the bailout that will dilute the currency, “ says Barisheff.
“The governments will be forced to print more money because politically that’s the least painful thing to do. And as they do the price of gold goes up.”
However, Barisheff warns that it’s easy for governments to lose control of their currency, which can send a country into hyperinflation. He says gold will stop rising when governments institute sustainable economic policies, but if inflation isn’t controlled, gold could rise as high as $10,000 in five years. “And there is no appetite to do anything sustainable.”