As the international reserve currency for the better part of a century, global trust in the US dollar has been virtually limitless.

At any time, in nearly any country, its role as the ultimate safe-haven currency and the universally accepted standard of economic value has been beyond question.

How the dollar became the one to rule them all

At the turn of the twentieth century, when the dollar was coming into its own, it was blessed by limited currency competition.

The sterling of the British Empire had run its course and during the Great War, Europe’s leading powers razed each other’s economic assets to the ground.     

The US on the other hand, had plenty going for it.

It assumed the role of the global export hub with a state-of-the-art manufacturing infrastructure; the mass inflows of physical gold it received bestowed global reverence upon the Federal Reserve; the newly federalized Internal Revenue Service (IRS) enjoyed access to a deep well of taxpayers maintaining robust dollar demand; and the unmatched depth of its bond markets catapulted the greenback to new heights.

In more recent decades, a much darker element has also come to the forefront.

David Graeber, anthropologist and noted author, wrote in his ‘Debt – The first 5,000 years’,

…U.S. military predominance…No other government has ever had anything remotely like this sort of capability. In fact, a case could well be made that it is this very power that holds the entire world monetary system, organized around the dollar, together.

Global shifts

Despite the dollar’s many strengths, no fiat currency has ever truly stood the test of time.

Without exception, reserve fiat currencies have come, conquered, and then been displaced.

Inevitably, political convenience trumps economic stewardship, resulting in the decline of reserve currency status.

Most commonly, excessive issuance leads to accelerated devaluation and inflates away economic value.

Disciplinary mechanisms that maintained the dollar’s strength were disregarded when it was divorced from silver and gold in 1964 and 1971, respectively.

Yet, for over 50 years, a completely free-floating greenback has held sway over global markets.

However, this may now be changing.

In the decade since the GFC, interest rates hit rock bottom and money printing reached eye-watering levels.

This situation was exacerbated during the global pandemic.

Economic activity ground to a halt, while the seemingly unlimited monetary stimulus was coupled with targeted fiscal policies and payroll protections, which fuelled four-decade highs in inflation.

To make matters worse, the weaponization of the dollar through SWIFT and the imposition of reams of sanctions, forced several of its biggest consumers to desperately search for alternative avenues of exchange.

At the global level, de-dollarization has certainly gathered significant momentum.

The countries spearheading these efforts represent a growing share of global GDP, hold sizeable commodity reserves, are united in their desire to side-step the dollar and shield themselves from Fed policy shocks.

China-Brazil trade has switched away from the dollar; Saudi Arabia offered to trade oil in alternative currencies; and accelerated central bank purchases of bullion are paving the way for a less significant role for the greenback.

Moreover, the BRICS summit in August is expected to birth a non-dollar, non-SWIFT payment mechanism that if successful, could play a key role in the monetary landscape of the twenty-first century.

Each of these countries is concerned by the prospect of sanctions either on themselves or on key partners, raging inflation and the deep erosion in US bonds.

The significance of precious metals

Gold and silver have themselves been money for thousands of years and are the most durable forms of money.

They also do not suffer from counterparty risk, ensuring their value is relatively immune to the risks of the global financial markets.

In a bid to relieve themselves from dollar dependence, central banks have continued to buy physical gold or repatriate the yellow metal from foreign vaults at a record pace.

Mike Maloney, precious metals investor and noted author, stated in his excellent series, Hidden Secrets of Money,

…it is the ultimate money because there is nothing else even in the same league. It’s divisible. It’s permanent. It’s a store of value. It’s a unit of account. It’s got everything you want out of money, but it doesn’t go away and it can’t be increased. That is what makes gold the most beautiful money of all. What more can you ask out of a money?

By being a hedge against inflation, precious metals protect against excesses such as unbridled spending by state authorities and outsized deficits.

The trouble at home

While the dollar’s clout appears to be declining overseas, several bills have also been introduced in nearly half of US states to guard against the potential implosion of the greenback.

In a conversation with physical precious metals investor, Ronald Branstetter on his Youtube channel Ron’s Basement, Pat Holland of the Missouri Freedom Initiative, a grassroots organization, noted that state governments have three key concerns in this regard.

First, inflation continues to ravage household budgets and threatens access to essentials such as fuel and food.

Secondly, in July this year, the US government is expected to roll out its Central Bank Digital Currency (CBDC).

Given the programmable nature of this instrument, Robert E. Wright, a Senior Research Fellow at the American Institute for Economic Research warns against excessive centralization of control over purchasing decisions of ordinary citizens.

Wright adds that CBDCs may not qualify as money under the Constitution.

Thirdly, with bonds bleeding over the past two years, an increasing number of states have found their pension funds in dire straits.

Although bond yields have been declining post the SVB crisis, at the time of writing, 10-year yields are up by 64.81 bps in the past 12 months, and approximately 2.7% higher since April 2020.

In this environment, states are being forced to liquidate ever larger amounts of their holdings to cover obligations, while liabilities continue to mount at an alarming rate.

As a result, pension funds are seeing material losses in capital, a decline in income on the sale of bonds, increased credit risks and higher chances of regulatory intervention.

In 2022, according to Equable, an organization dedicated to retirement security, only 7 states and Washington DC had a funding ratio of 1.0 or over for their public pension schemes.

To boot, the sudden fragility of the banks and the risk of systemic escalation is driving greater urgency among the states to hedge their exposure to the dollar.

More concerningly, with dollar demand slowing globally, and if the BRICS+ are successful in their endeavour, the excess currency that has been circulating overseas is likely to make its way back to the USA.

Interested readers can access articles at the highlighted links discussing the views of well-known analysts such as Peter Schiff and Andy Schectman who expect that the influx of such a volume of currency could spark a resurgence in inflation.

What are states doing to protect themselves?

With the alarming rise in the risk of dollar-denominated debt and the potential return of much higher inflation, individual states are now taking steps to shield themselves against a future featuring a dwindling dollar.

The truth is that fiat currencies depend on the credibility of the issuer, and their robustness is a function of place and time.

Once this credibility inevitability begins to decline, the currency loses its lustre.

Unlike fiat currencies, the value of gold and silver has never been extinguished, and in times of turmoil, such as during currency transitions, they tend to preserve their value far more effectively than other financial instruments.

Today, grassroots organizations and sitting politicians are drawing upon Constitutional expert Professor William Greene’s 2010 boilerplate draft of the ‘Constitutional Tender Act’, to launch a movement to reclaim the right to recognize physical gold and silver as legal tender.

Writing for the Sound Money Defense League, Stefan Gleason, President of Money Metals Exchange, bucketed state legislative efforts into three key categories.

The first step towards mainstreaming recognition as legal tender is to eliminate sales tax from precious metals, which is now the case in 42 states.

This is crucial because it eliminates needless transaction costs and unnecessary frictions which can hamper freedom of exchange.

Moreover, sales or capital gains tax implies that gold or silver is a commodity and not money.

Secondly, states are looking to establish depositories or precious metals reserves to act as a hedge against runaway inflation and to boost pension funds.

Thirdly, newly introduced bills are arguing for the removal of income tax on the sale of gold or silver.

The legitimacy of such efforts would flow from Section 10 of the U.S. Constitution which notes,  

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

This may sound like a radical idea, but as mentioned earlier, dollars were backed by silver and gold till not very long ago, and states are focusing on simply reinstating this recognition.

In a widespread movement, local grassroots organizations and state lawmakers have introduced bills to initiate this process in at least 23 states, with legislators of at least 10 states introducing their version of the bill in 2023 alone, including Montana, Missouri, Kansas, Oregon, Kentucky and Wisconsin.

A case study of Missouri’s SB-100

Holland is one of the leading figures advocating for the SB-100, or Missouri’s bill, which was introduced by Sen. William Eigel (R) to give citizens the right to use gold and silver as legal tender.

In his opinion, the foremost concern for state legislators is the pressure placed on public pensions that are threatened by unfunded liabilities.

The bill is currently assigned to the executive session of the House’s Special Committee on Governmental Accountability and will be discussed on the 12^th of April.

Interestingly, Missouri is home to two regional Federal Reserve Banks, i.e. St. Louis and Kansas City.

The key pillars of the bill are listed below.

1. The state should recognize gold and silver as money, both of which can be used for the purchase or repayment of debt.
2. Precious metals shall be valued by the state at spot plus a market premium.
3. All taxes should be eliminated on the sale of precious metals.
4. The treasury must be willing to accept payment of state taxes in gold and silver.
5. The treasury must maintain a minimum of 1% of operational reserves in precious metals in a special reserve or depository.
6. Following Roosevelt’s confiscation of gold during the Great Depression, the bill also prohibits any state agency from seizing physical gold holdings.
7. Lastly, the bill seeks to prevent the imposition of digital currency as a compulsory form of transaction. The supporters of the bill prefer to maintain optionality for the consumer.

In light of the erosion of the dollar, controversial Fed policies and higher-for-longer inflation, Holland remarked,

 …this is literally a defence mechanism that is afforded to us by the US Constitution.

To maximize chances of passage, the bill steers clear of challenging the dollar or commenting on the domain of the Federal Reserve.

The bill also allows for maximum flexibility on part of the treasury.

For instance, authorities would have a wide variety of models to choose from when establishing infrastructure and mechanisms to implement the bill (if it passes), including the use of standard gold and silver coinage, widespread rollout of digital meters to assess weight, acceptance of increasingly popular goldbacks, or partnering with private bullion banks and third parties that can offer accounts denominated in gold and silver.

If successful, the bill would eventually offer an avenue for sound money transactions to preserve purchasing power of individuals and businesses in the event of severe budgetary imbalances, excessive money printing at the Federal level or unbridled spending by state authorities.

Crucially, the acceptance of precious metals by the state government, coupled with advances in technology such as gold-backed credit and debit cards could mainstream the exchange of metal ownership as a basis for transactions.

States with active legislative processes

US states are wary of the possibility of the loss of the dollar’s reserve currency status and the effect this may have on pension systems.

The rout in treasuries, risk-free instruments that form the bedrock of the global economic system, and the prospect of higher inflation have fuelled urgency across legislatures.

In a rare show of unity, several legislators have independently filed such bills to at least start the process of recognition of precious metals as legal tender.

In some cases, these have been met with virtually no opposition, such as in Tennessee where the House voted 98-0 in favour.  

As of April 3^rd 2023, the following states have pending bills that are on the pathway to recognizing gold and silver as legal tender.

Montana	Missouri	Kansas	Oregon	Kentucky
Wisconsin	Tennessee	Iowa	Mississippi	West Virginia
Minnesota	Vermont	Alaska	South Carolina	Idaho
Arkansas	Maine	New Jersey	Arizona	Texas

According to the Tenth Amendment Center, Utah Legal Tender Act (2011) and Wyoming Legal Tender Act (2018) already recognize gold and silver as legal tender.

Legislators from Wyoming attempted to amend and strengthen the existing act but this failed in the House in March 2023.

Oklahoma also eliminated the tax on sales of precious metals in 2014, categorizing it as legal tender.

In 2023, the state moved to mandate the establishment of a state-backed gold depository in the offices of the treasury via SB816, introduced by Sen. Nathan Dahm (R).

A new source of demand

For gold investors, provisions that would mandate minimum precious metals holdings in the state treasury could significantly boost demand for physical metals.

For instance, Ron’s Basement estimates that Missouri alone would need to purchase $9 million worth of bullion to meet the 1% criteria laid out in the bill.

With drives to establish state-backed precious metal depositories throughout the country, this could spur fresh momentum in the bull market for gold and silver.  

For states, this could also bring in revenues by providing state-protected vault services and allocated accounts for a fee, particularly to wealthy individuals.

However, as always, the devil is in the details.

If these bills were to become law and drive genuine demand, they would have to be passed with an emphasis on physical holdings, and restrict dilution into paper gold.

Interested readers can find more information on the dynamics between physical gold, physical silver and their paper variants in the highlighted links.  

Secondly, it is unclear if the mandated quantum of gold would be readily available, and severe shortages may end up forcing precious metals back towards investment status, rather than as tools for purchase as intended by these bills.

One thing is certain. The dollar is beginning to see challenges both abroad and at home.

The post Gold and silver outlook as 23 states move to reclaim precious metals as legal tender appeared first on Invezz.

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