The U.S. dollar may not be "as good as gold," but it is holding its value pretty well. Even more so, the increased volatility in gold prices suggests the shiny metal may not be the best benchmark.
Since the financial crisis and recession of 2007–09, the Federal Reserve has pursued many unconventional ways to increase the money supply and spur economic activity. Over the last five years, the Fed has expanded the money stock and its balance sheet nearly fourfold by buying up government debt and mortgage securities.
In response to these loose money policies, many investors turned to gold and silver, the commodities long thought to be the best hedges against inflation. At $1,400 per ounce today, gold has almost tripled in price since the start of 2007. However, the increase in a gold investment is cut by almost a third after taxes.
U.S. Sen. Mike Lee, R-Utah, is trying to change that. In April, Lee re-introduced the Sound Money Promotion Act, which would change the legal tender laws so that gold and silver coins receive the same tax treatment as U.S. currency.
Under current law, gold and silver coins are considered collectibles, making any gain on the sale of these coins subject to a 28 percent capital gains tax. Lee's bill would remove this label and give gold and silver coins the same legal status as the Fed's money.
The change would be welcome news to companies that sell gold and silver. Idaho-based Coeur Mining Inc. (renamed last month from Coeur d'Alene Mines Corp.) and others could see increased sales if the changes go through.
But while the new legislation will level the playing field for one set of dollar alternatives, it doesn't go far enough to change the incentive policymakers have to pursue inflationary policies. Also, there is little evidence the Fed has caused any inflation since the crisis.
Although the U.S. dollar has lost a lot of value against gold, its purchasing power in terms of goods and services is holding up well, and its inflation-adjusted value against other currencies is still high. In terms of consumer purchases, the dollar has lost 12.5 percent of value since the start of 2007, not much more than the 11 percent drop in value over the previous five years.
The U.S. dollar is also holding its own in terms of goods bought elsewhere. Since 2007, the dollar is off only 3 percent in terms of what it can buy in the currencies of our major trading partners.
The Sound Money Promotion Act will provide some alternatives, but why stop at just coins? The best hedges against the loose money policies of the Fed are multiple alternatives. If people don't like our money, they should be able to go elsewhere. If we want U.S. businesses to compete in a truly free market, they should be able to accept any currency for payment on goods and services, be it private, virtual currency or that issued by foreign countries and banks.
The Sound Money Promotion Act provides tax justice for gold and silver investors, but its enactment would do little to control the Fed or stop inflation. More competition is your best enforcer.