Federal Reserve Chairman Ben Bernanke took to the stand in Congress on Wednesday to defend the Fed’s Quantitative Easing programs. Rep. Ron Paul (R-TX) asked Bernanke point-blank whether Gold was money. Bernanke responded with a simple, “No.” For such a well-respected chairman to answer so flatly regarding Gold, one would imagine Gold prices had tanked. Just the opposite occurred- Gold closed at a record high on Wednesday, over $1,580/oz. So, maybe the question goes a little deeper. What constitutes money?
Generally speaking, there are three main functions of money. The first is as a medium of exchange. Rep. Paul went on to explain to Bernanke that Gold has been used as a currency for some 6,000 years. As economies developed throughout history, representative money such as the Gold standard gradually replaced commodity money.
The second function is as a unit of account. Since the world went off the Gold standard in 1971, fiat currencies serve as the unit of account. Central banks are permitted to print money as they see fit or as policymakers dictate. They then use the paper money as a measurement of value for things like goods, services, and assets.
The third function of money is as a store of value. According to the World Gold Council, “Gold has maintained its value in terms of real purchasing power … Despite price fluctuations, Gold has consistently reverted to its historic purchasing power parity with other commodities and intermediate products.” In other words, Gold (historically) has protected wealth. Central banks are seeing this. In 2010, they became net buyers of Gold for the first time in over twenty years. In the first half of 2011, they bought more than all of 2010.
Maybe Bernanke answered a question correctly. Maybe he thought the question was something along the lines of, “Is Gold the same thing as the sheets of paper you and the Fed have decided to insert into the economy?”
By Ryan Schwimmer, APMEX Account Manager