During today’s Congressional testimony Fed Chairman, Ben Bernanke, was confronted by Rep. Ron Paul with the question, “Is gold money”? (see video below) The Chairman answered, “no” and went on to say the reason why central banks hold gold is because of “tradition”. Interesting!
In prior posts we’ve written about how difficult it to even to define money, much less measure it. The traditional and most basic test is does the object – piece of paper, commodity, item — act as a: 1) medium of exchange; 2) store of value; and 3) unit of account.
Though gold has not yet become a widespread medium of exchange, that is, used to transact in the marketplace, or used to price goods as a unit of account, it certainly seems to have become a standard international store of value. Many of our very smart friends tell us they are more uncomfortable holding cash dollars than almost any other asset class and would rather hold gold or other commodity ETFs. From what we read, the Chinese government and other central banks seem to feel a similar discomfort. Can you blame them with negative real interest rates?
Given the ease at which one can now convert, say the gold ETF, GLD, into purchasing power, we would argue that it, or any commodity or asset, for that matter, is becoming a quasi-medium of exchange. For example, a $100K brokerage account fully allocated to GLD can write checks on the balance, either using margin or selling down a portion of the position. The ease at which the yellow metal can be held and converted into purchasing power increases its use as a medium of exchange and therefore makes it money.
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