The Arizona legislature last week tried to legalize shopping with gold and silver coins. Thankfully, Gov. Jan Brewer quickly put the kibosh on the idea, vetoing the law on Thursday. But even if she hadn't, it never would have worked.

I'm sorry. Did that statement sound a bit too matter-of-fact? Too dismissive of the gold bugs' idea of a "sound monetary policy"? Well, let's consider the evidence.

Bugs of a feather flock together

Arizona's proposed law was flawed from the get-go, because it fatally misunderstood the philosophy behind precious-metal investors. Stock investors sometimes buy gold stocks such as Yamana Gold (NYSE:AUY) or Goldcorp (NYSE:GG) in hopes they will rise in value, so they can cash out at a profit. (Although with Yamana shares down 13% so far this year, and Goldcorp down 21%, there have been precious few profits to cash out lately.) They're equally willing to trade one gold-mining stock with a high P/E (Goldcorp costs 16.5 times earnings for example, and Yamana more than 20) for a gold miner that looks cheaper than the competition -- for example, Newmont Mining (NYSE:NEM), which costs only 10 times earnings.

People who buy actual precious metal -- or invest in it vicariously, through ETFs such as SPDR Gold Shares (NYSEMKT:GLD) or iShares Silver Trust (NYSEMKT:SLV), which own actual ingots -- have a different motivation. They buy gold or silver because they think it's safer than cash. They're convinced the metal will hold value over time. More than that, they're convinced it will gain value over time. Hence, they're wholly uninterested in converting their gold or silver into cash, or, even worse, converting their gold and silver into orange juice and Oreos at the supermarket, as Arizona's law would have permitted.

Had Gov. Brewer signed Arizona's bill into law, Arizona would have joined Utah as the second state in the Union to permit use of gold and silver coins as currency. Colorado tried to follow suit last year, but the bill died in the state Senate, and several other states are said to be contemplating, or actually working on, similar legislation. But for now, the sole state in the nation that permits use of gold and silver as legal tender is Utah.

So how's that working out?

Recognizing that even with the law's passage, few Utahns would feel comfortable walking down the street, their pockets a-jingling full of gold and silver coins (muggers being one risk, holey pockets another), Utah came up with an alternative. Rather than literally paying for goods and services in gold coins, the state permitted the establishment of a depository -- the Utah Gold and Silver Depository -- where folks could deposit their precious-metal coinage, and bullion as well.

Deposits would be linked electronically to debit cards at UGSD, which account holders could then use to pay for goods and services with funds backed by their gold and silver -- funds that automatically translated the day's price for an ounce of gold, for example, times the amount of gold in an account, into a current gold-backed balance that could be paid out of the card.

Sound OK so far? Well, here's the problem: No one actually wanted these accounts.

What if they held a war against fiat currency, and nobody came?

Two years after Utah's gold-bug law passed, the UGSD website still bears this message, front and center on the homepage:



The Depository is dedicated to restoring the option of 'sound money' to the people of Utah. While we are not yet opening new accounts, we are connecting with our future customers now. Discover what the Utah Gold & Silver Deposiory [sic] offers, and pre-enroll for an account today.

It doesn't take a whole lot of between-the-lines reading to figure out what's going on with Utah's gold-coin law today. Two years after passage, the depository set up to put the law into practice is still trying to find someone -- anyone -- interested in taking advantage of it. Indeed, traffic to the site appears so light, and interest so little, that UGSD hasn't even bothered to run a spell-check on its main page and catch that little typo up above!

Fooled by gold

And little wonder. Over the past year, gold prices are down by more than 10% already. And anyone who took up Utah's generous offer in September, say, and made a deposit with UGSD then, would have found themselves 25% poorer by March.

That's hardly the kind of monetary stability that Utah's law seemed to promise. But it's precisely the kind of volatility that Arizona's law would have delivered, had the governor signed the law.