Wednesday, July 31, 2013

Is Gold Money?

Is Gold Money?

The question "Is gold money?" seems a topic of debate.   In a U.S. House Financial Services Committee Meeting on July 13, 2011, Congressman Ron Paul asked Federal Reserve Chairman Ben Bernanke – "Is gold money?" Chairman Bernanke answered, "No.  It's a precious metal."  Obviously, Congressman Paul thinks the answer is yes.  James Turk, founder and chairman of GoldMoney, claims "Gold is money!"

Who is correct?

James Turk says, "Gold is just a sterile asset.  It has no cash flow. It doesn't generate wealth.  It protects wealth. That's why it's money."  At an investment conferment in Munich in 2011, Mr Turk said, "Rather, gold’s usefulness arises from its reliability in economic calculation to determine the price of goods and services.  In other words, gold is money, and therefore is no less useful than other so-called non-productive assets like the paper banknotes and bank ledger entries that we call dollars, euros, yen and pounds."

Chairman Bernanke when on to say in answer to Congressman Paul, "I pay attention to the gold price.  But I think it reflects a lot of things.  It reflects global uncertainties.  I think the reason people hold gold is as protection against of what we call tail risks, really, really bad outcomes.   And to the extent that the last few years have made people more worried about the potential of a major crisis then they have gold as a protection."   Bernanke also said, "Well, you know, it's an asset. Would you say treasury bills are money?  I don't think they're money either, but they're a financial asset."

To answer the question "Is gold money?" we have to agree on a definition of money:  "Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socioeconomic context or country.  The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can serve as money." - Wikipedia.

Again from Wikipedia, "A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system."

Gold is not currently used as a medium of exchange in any country.  Therefore, based on the definition of money above, gold is not now money.  Gold has been money in the past and could be in the future; but, strictly speaking, gold is not money.

Paul, Bernanke and Turk do agree on one thing: gold is a store of value and protection against risk.

Gold is Insurance.

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