Read Bernanke's Lips: Gold Is Not Money

If gold is not money, then we had better identify a viable hard-money alternative … and fast!

When asked by Rep. Ron Paul (R-Texas) Wednesday on Capitol Hill whether he thought gold was money, Federal Reserve Chairman Ben Bernanke appeared to need a few moments to think about it.

Finally, he responded: "No, it's not money. It's a precious metal."

Like Fred Astaire and Ginger Rogers, Paul and Bernanke reliably entertain audiences each time they come together on the screen to dance around each other's diametrically opposed perspectives on economic policy and theory. Their latest number continued:

Paul: "Even if it's been money for the past 6,000 years, somebody reversed that, eliminated that economic law?"

Bernanke: "Well, it's an asset. Would you say Treasury bills are money? I don't think they're money, either. They're a financial asset."

Paul: "Why do central banks hold it?"

Bernanke: "Well, it's a form of reserve."

Paul: "Why don't they hold diamonds?"

Bernanke: "Well, it's tradition, long-term tradition." [Paul laughs.]

Some may accept at face value Bernanke's bold declaration that gold is not money, but I've resolved to remain more circumspect toward the chairman's communications. Sometimes I even feel the need to offer a Foolish translation of his messages.

This is, after all, the same Ben Bernanke who offered the following during his confirmation hearing in 2005:

I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process, are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too big too fail, so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well managed and well controlled.

Sorry, Ben … you lost a chunk of credibility the moment that entire statement proved to be not just a little bit wrong, but completely and disastrously wrong-minded. And housing -- boy, was he ever wrong about housing!

Let's not forget that the nature of the position itself may make it difficult for the guy to level with the American people. Who can forget this telltale quote from former Federal Reserve Vice Chairman Alan Blinder: "The last duty of a central banker is to tell the public the truth." We already know that a veil of secrecy overlies the global gold market, so truth and transparency seem unlikely to flow freely on the topic.

So when Bernanke tries to convince you that gold is not money, I urge a healthy dose of skepticism. The Federal Reserve has a vested interest in preserving an image of resiliency within the very same fiat currency that carries the ultimate burden of its easy monetary policy: the U.S. dollar. An overwhelming 96% of respondents to a 2009 informal Foolish poll indicated that they view gold as money, and I, of course, am one of them. The idea that gold ceased to be money just because President Nixon closed the gold window in 1971 does not stand up to scrutiny, particularly when central banks around the globe continue to hold substantial quantities of gold bullion among their currency reserves.

I believe the past and future actions of the Federal Reserve under Bernanke are exceedingly likely to further a long-term devaluation of our currency to where one U.S. dollar will suffice for only 0.005 ounces of gold (at $2,000 per ounce). For a means to safeguard investment capital from that devaluation, the Sprott Physical Gold Trust (NYSE: PHYS) is one to trust for bullion exposure, though it's best to buy into relative weakness. For some higher-octane exposure, though, I continue to recommend high-quality gold miners, including my new top pick, Northgate Minerals (AMEX: NXG). Earnings results will be rolling out shortly, and I expect low-cost leaders Goldcorp (NYSE: GG) and Yamana Gold (NYSE: AUY) to shine. Peruse my recent review of "Top 10 Gold Stocks for New Money Now" for additional ideas, featuring Thompson Creek Metals (NYSE: TC), New Gold (AMEX: NGD), and rebounding phenom Brigus Gold (AMEX: BRD).

Although gold exposure can certainly present some wild swings in both directions, given the substantial uncertainty hovering over the outlooks for both the euro and the U.S. dollar, I find comfort in my own exposure to the one form of money that is not imperiled by this ongoing global currency crisis. Not only is gold clearly money, but through carefully vetted investment vehicles, participating Fools can make some money besides.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Brigus Gold, Goldcorp, New Gold, Northgate Minerals, Thompson Creek Metals, and Yamana Gold. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 16, 2011, at 6:31 PM, Indianagol wrote:

    Money (Noun): Unit of exchange

  • Report this Comment On July 16, 2011, at 8:00 PM, theHedgehog wrote:

    Christopher, you can have this post pulled too, if you like, but if you have to convert it to another medium before you can buy something, then it's not money. Gold, oil, platinum, copper etc all have value, but you can't buy a Big Mac with them, nor anything else, without first exchanging them for dollars, or francs, or lira, or rubles, or whatever the local money is.

  • Report this Comment On July 16, 2011, at 8:59 PM, Gonzhouse wrote:

    theHedgehog

    Next time you are in Utah and ordering a Big Mac, consider this: the Utah Gold and Silver Depository was to open June 1, and consumers can store their gold coins there in exchange for a debit card that draws on their funds there.

    I haven't followed the story extensively but other states are considering the same legislation since Utah legalized gold and silver as currency.

  • Report this Comment On July 16, 2011, at 9:23 PM, XMFSinchiruna wrote:

    theHedgehog,

    I don't recognize your username, so I'm not sure what you're referring to, but...

    The U.S. Mint does indeed issue gold coins denominated in USD. You can, in fact, buy a big mac with a gold coin, if you so desire (though with melt value astronomically higher than face value, there is disincentive to do so).

    The foreign currency reserves of nations are also troves of money, and there again you will find gold.

    Alan Greenspan concedes gold is money.

    The state of Utah recognizes gold as money.

    Switzerland is discussing a return to gold currency.

    Nations around the world are busily shoring up their gold reserves as competing currencies continue to fail. They are moving from paper money to hard money.

    Gold, Mr. hedgehog, remains money. If I walked into a supermarket tomorrow with an ounce of pure gold, I bet I could walk out with some groceries, because someone in the place will recognize that gold is money. In fact, unlike most of the fiat currencies you mentioned, gold's value is recognized everywhere in the world.

    After decades spent trying to walk away from gold as money, the collective malfeasance in stewarding our paper currencies has forced gold back onto the scene as the one currency that can not be mired in counterparty risk.

    Finally, when Nixon closed the gold window in 1971, he presented the action as a temporary emergency measure, so even on that admittedly technical basis the dollar's convertibility to gold has never been severed in an explicitly permanent way.

    I have been on the right side of gold's bull market for more than 6 years and $1,100 of price upside. I was able to position myself early in the move precisely because I recognized gold's immutable monetary role. Gold, my friend, is money, and it will remain money for a lot longer than many of the unbacked currencies circulating today.

    You might just want to get yourself some.

  • Report this Comment On July 16, 2011, at 9:42 PM, TMFHousel wrote:

    << If I walked into a supermarket tomorrow with an ounce of pure gold, I bet I could walk out with some groceries, because someone in the place will recognize that gold is money.>>

    It would be an interesting experiment. I'd like to see it attempted.

  • Report this Comment On July 16, 2011, at 10:05 PM, XMFSinchiruna wrote:

    Housel,

    Send me an ounce of gold, and I'll make it happen. :)

  • Report this Comment On July 16, 2011, at 10:23 PM, theHedgehog wrote:

    TMFSinchiruna :

    >>The U.S. Mint does indeed issue gold coins denominated in USD.<<

    Aren't you now arguing against your own point? If the gold part of the coin was actually money, why would it need to be denominated in USD?

    TMFSinchiruna :

    >>Send me an ounce of gold, and I'll make it happen. :) <<

    Perhaps, but they will have to convert it to USD first, and you will most likely have to pay much more than the spot premium. If you are able to do it at all, it will be a special case, and will still rely on a transaction in USD to make it happen.

    Gold is not money. It can be converted to money, and money can be converted to gold, but gold is not money.

  • Report this Comment On July 16, 2011, at 10:25 PM, theHedgehog wrote:

    << If I walked into a supermarket tomorrow with an ounce of pure gold, I bet I could walk out with some groceries, because someone in the place will recognize that gold is money.>>

    To beat a dead horse further into submission, I will note that what you really mean is that "someone in the place will recognize that gold HAS VALUE".

    I have a bunch of expensive vintage Collins ham radio equipment. They have a high value, but they are not money.

  • Report this Comment On July 16, 2011, at 10:32 PM, whereaminow wrote:

    theHedgeHog,

    You are confusing Economic Law (such as, ceteris paribus, an increase in the supply of money will cause an increase in the price of goods priced in that money), with a political expediency.

    Unbacked dollars were created through a political act. You cannot repeal Economic Law through a political act. Therefore, the mere existence of these laws does not refute the underlying truth that gold is money.

    As I've said before, if a politician declared that cars could not be used any more as transportation, it would be true that insofar as the current use of violence by the government makes your car infeasible as a means of transportation, that does not inherently change your car in any way. It is still capable of transporting you were you want to go.

    Gold is still capable of being an excellent money. Political games do not change this.

    6,000 years vs 40 years.

    If 200 or so generations from now, unbacked paper dollar still circulate (can you imagine THOSE denominations ROFL), I will concede that unbacked paper is just an efficient and sensible a money as gold, and that governments were correct to use violence to end the natural Economic Laws that brought about the use of gold as money in the first place.

    Something tells me that no one will seriously consider the idea that unbacked paper is going to last even 600 years. 60 is highly unlikely. 6 might even be a stretch.

    Have a great day and I will not respond to your rebuttal unless it is entirely unique and insightful.

    David in Qatar

  • Report this Comment On July 16, 2011, at 10:41 PM, theHedgehog wrote:

    >>Have a great day and I will not respond to your rebuttal unless it is entirely unique and insightful.<<

    Reminds me of a kid with his fingers in his ears: "I can't hear you. I can't hear you. So I win."

    From my reading of this thread so far, everyone, including the estimable David in Qatar, has refuted his own assertion that gold is money, so no, there's not really anything left for me to say.

  • Report this Comment On July 16, 2011, at 10:45 PM, theHedgehog wrote:

    Robert Blumen has a good article on the difference between gold and money here: http://mises.org/daily/3086

  • Report this Comment On July 16, 2011, at 10:55 PM, whereaminow wrote:

    Hedge Hog,

    You obviously understand Blumen, Ron Paul, myself, or Mr. Barker.

    From the article you cite:

    "Why were Milton Friedman and the other economists wrong? Their error was the assumption that political institutions have the final say over what is and is not money. But this is not so: the market has final say. "

    This is EXACTLY what I am saying, what Ron Paul is saying, and what Mr. Barker is saying.

    You can try to repeal Economic Law through politically acts but the market has the final say over what is or is not money. The market does not have a say in our world today. That doesn't mean gold is not money. That means violence was used to OVERRIDE the market's decision.

    It is no different than the example of the car I used above.

    You are clearly hung up on "operational reality." We know that right now gold as money is not in place because of political obstacles. No one denies that. But, and this is what we are trying over and over and over and over and over again, to explain to you is that the underlying truth can not be covered up forever through an act of violence. The underlying truth is that gold is money because the market has the final say. And it will have its say whether you or all the politicians or bankers in the world like it or not.

    David in Qatar

  • Report this Comment On July 16, 2011, at 10:57 PM, whereaminow wrote:

    I'm very tired. This:

    You obviously understand Blumen, Ron Paul, myself, or Mr. Barker.

    Should read:

    You obviously do not understand what Blumen, Ron Paul, myself, or Mr. Barker are saying.

    David in Qatar

  • Report this Comment On July 16, 2011, at 11:05 PM, theHedgehog wrote:

    "We know that right now gold as money is not in place because of political obstacles. No one denies that."

    If you know that, then why do you continue to argue against it? Do we have to start discussing the meaning of each and every word before we can even discuss the issue at hand? I'm reminded of Clinton's comment - something like "that depends on the value of what 'is' is." If we are going to have a discussion, any discussion, we have to have at least a moderate agreement on what the meaning of the words are. True?

    Gold was once money. In the future, due to political or even biblical circumstances, it may become money again. But gold, while having an intrinsic value, is not currently money. There are many things which have great intrinsic value but are not money. What is it about gold that makes you argue that it is different?

    Hedge

  • Report this Comment On July 16, 2011, at 11:15 PM, whereaminow wrote:

    "If you know that, then why do you continue to argue against it?"

    We're trying to help you understand the underlying truth. If you think you've got it, I'm happy to move on.

    "But gold, while having an intrinsic value, is not currently money."

    Ugh. Gold does not have intrinsic value. It has exchange value and use value. This is Chapter 6 of Carl Menger's Principles of Economics.

    http://mises.org/etexts/menger/six.asp

    And, for the 12th time, gold is not currently USED as a money. The market has the final say so of what is and is not money, not you and not the government.

    Perhaps you believe that something loses its natural properties because of a political act.

    Have a great day. Stubbornly miss the point about the market having the final say with someone else's time.

    David in Qatar

  • Report this Comment On July 16, 2011, at 11:21 PM, theHedgehog wrote:

    "And, for the 12th time, gold is not currently USED as a money. The market has the final say so of what is and is not money, not you and not the government."

    OK. If the market says it's not money, and the government says it's not money, and the the cashier at McD says it's not money, and David from Qatar say's it not money, then what are we arguing about?

  • Report this Comment On July 16, 2011, at 11:21 PM, shamapant wrote:

    All theHedgehog is saying is that gold in itself isn't money, its the fact that people recognize its value in terms of international currency that makes it usable as money. However, because gold's inherent value will never be 0, I would argue that gold IS money just like an acre of land IS money.

  • Report this Comment On July 16, 2011, at 11:31 PM, whereaminow wrote:

    Hedge,

    "If the market says it's not money,"

    Are you are a troll? Is that what you stoop to?

    For the 13th time, the market chose gold. The market says it is money. Government used violent intervention to override the market decision.

    Now, tell me, what part of that statement is unclear to you?

    You do know what a market is right? You know what a government is right? You know what a political act is right? You know the difference between force and voluntary exchange?

    Or are you just a useless troll?

    David in Qatar

  • Report this Comment On July 16, 2011, at 11:41 PM, MazonCreekRich wrote:

    There is little in life that is less interesting than people arguing about a definition of a term.

    Is gold money? Tell me your definition of "money" and I will tell you your answer to that question. There are many very interesting questions about gold -- but this sure is not one of them!

    Personally, I think it is really interesting that people could agree, tacitly, almost universally, and for more than 5,000 years, that gold will play the role that it does -- whether one calls that role "money" or something else.

    As far as I can tell, it is this incredible fact of mass tacit agreement that makes gold so fundamentally different than something like platinum or Tully Monster fossils.

    MCRich

  • Report this Comment On July 16, 2011, at 11:47 PM, theHedgehog wrote:

    "Tell me your definition of "money" and I will tell you your answer to that question."

    Thank you. I wish I had said that in my first post and moved on.

    Hedge

  • Report this Comment On July 17, 2011, at 12:47 AM, Rosco1776 wrote:

    I'll keep buying metals with paper as long as I can. :-)

  • Report this Comment On July 17, 2011, at 2:47 AM, lnardozi wrote:

    It might be illuminating for some readers to find out how we GOT on the fiat money standard. Check out this paper from the Federation of American Scientists that explains how we got on the fiat dollar standard.

    http://www.fas.org/sgp/crs/misc/R41887.pdf

  • Report this Comment On July 17, 2011, at 9:33 AM, theHedgehog wrote:

    That's an interesting and informative article, Inardozi. Thanks for linking it.

  • Report this Comment On July 17, 2011, at 10:18 AM, Paveway3 wrote:

    I don't have an economics degree, but this is what my hillbilly logic tells me: I buy things with money, and I sell things for money. I have never used gold to buy dollars, but I have used dollars to buy gold. Nobody says that 1600 dollars are worth an ounce of gold, people say gold is worth 1600 dollars an ounce. Maybe if I get me more book learnin' I'll understand why I'm wrong, but for now I'm going with 'gold is not money.' And I believe what I read on the internets here: http://www.businessinsider.com/bernanke-is-gold-money-2011-7

  • Report this Comment On July 17, 2011, at 11:11 AM, AvianFlu wrote:

    OK. Try this logic:

    If you walk into a supermarket with some Japanese Yen you probably won't be walking out with any groceries. Does that mean that the Yen is not money?

  • Report this Comment On July 17, 2011, at 11:15 AM, smartmuffin wrote:

    People are spending a lot of time on the first part of this exchange, when I think the second part is far more illuminating.

    Bernanke suggests "people" buy gold to protect against "very bad outcomes," yet when asked why central banks hold it, he just says "tradition." By doing this, he's essentially echoing the message of the politicians and the media, that individuals buying gold are crazy, tinfoil-hat wearing conspiracy nuts, but that our wise and benevolent overlords (in the forms of governments and central banks) of course are buying it because they're smarter than us and know what's best and who are we to question them? But they're certainly NOT buying it because they too recognize a large risk of "very bad outcomes" and want to protect themselves. Oh no! That's not it at all!

    A classic example of "Do as I say, not as I do" if ever there was one.

    I'm going to do something I rarely do, and actually AGREE with those people making an appeal to the experts. The central bankers probably HAVE spent a lot more time than me analyzing the risks endemic to the global economy. If gold is good enough for them, it's good enough for me.

  • Report this Comment On July 17, 2011, at 11:17 AM, TMFHousel wrote:

    <<If you walk into a supermarket with some Japanese Yen you probably won't be walking out with any groceries. Does that mean that the Yen is not money?>>

    In America, yes. Save for its convertibility into U.S. dollars, most Americans would find yen worthless.

    That doesn't mean it doesn't have value; just that it's prime value to Americans, for domestic purposes (traveling to Japan is a different story), is its convertibility into dollars.

  • Report this Comment On July 17, 2011, at 11:40 AM, AvianFlu wrote:

    Housel:

    I'm confused. In your last sentence you say the Yen has value. In the previous sentence you say the Yen is worthless.

    I just hope someone dumps about 50 million worthless Yen on me soon so I can retire.

    For the record, I view gold as an asset that retains it's value in times of currency debasement. So maybe I have some small agreement with the Bernanke. It may never happen again!

  • Report this Comment On July 17, 2011, at 11:55 AM, TMFHousel wrote:

    It could have been worded better, but I feel exempt from making sense on Sunday mornings, and especially before coffee.

    Here goes again: For most Americans, yen do not offer the benefits of anything resembling currency (again, for domestic purposes). This, however, doesn't make it worthless because those yen are convertible into dollars -- the only currency you can buy stuff with practically in the U.S.

    To Americans whose bills are denominated in dollars, yen is an asset rather than a currency. My feelings toward gold are roughly the same.

  • Report this Comment On July 17, 2011, at 12:01 PM, TMFHousel wrote:

    And someone correct me if I'm wrong, but the Utah/gold deal does not exactly make gold a currency. The products you're purchasing are still denominated in dollars, but those dollars come from the conversion of gold being held on deposit. I can sell Coke stock and use the proceeds to pay my bills, but that doesn't make Coke stock a currency.

  • Report this Comment On July 17, 2011, at 12:04 PM, Paveway3 wrote:

    Thank you Housel for clarifying my point.

    AvianFlu: you aren't confused, you're intentionally distorting Housel's statement by ignoring the first part of the sentence <<Save for its convertibility into U.S. dollars>>. Housel didn't say Yen are worthless, just that they aren't considered money in the United States. Having value does not equate to being money, which it the point of this whole discussion about gold.

  • Report this Comment On July 17, 2011, at 12:05 PM, TMFHousel wrote:

    ^ To clarify, the above comment refers to the Utah Gold and Silver Depository debit card plan.

  • Report this Comment On July 17, 2011, at 12:09 PM, TypingMonkey wrote:

    Economics professor here.

    There seems to be some confusion between "legal tender" and "money". Legal tender is something like the US dollar. Business are required to accept payment for their products in US dollar. This is a legal requirement.

    In economics, "money" refers to any medium of exchange that can be used to store value so that you can hold "money" instead of bartering 15 different times to get what you want. In many World War II POW camps, it was common for cigarettes to be "money" because they were small, light, and almost universally desired.

    Gold happened to be a universal "money" for most of human history. Even without laws saying that gold must be accepted as payment, gold was accepted as payment almost everywhere.

    Is it money today? Yes. Money does not have to be a universal medium of exchange. As long as there are enough people who will accept gold as payment, it is money. There are still a lot of people who will do so. Just because a minimum wage employee at McDonalds who has no stake in the profits of her employer refuses to handle the "hassle" of accepting gold as payment does not mean that there are plenty of business owners who will accept gold as payment.

    However, we should also accept the fact that gold is not universal money as the US dollar is at the moment. That is an artifact of the government backing. If the US decided to back the paper money today with gold, then gold IMMEDIATELY becomes all currency even if we keep using those greenbacks because those greenbacks would then represent pieces of gold.

    Lastly, I am sorry if this causes a panic, but central bankers are not as smart as you think. Most people don't know this, but undergraduate economics textbooks are based on some really shaky theories and even outright falsehoods. For example, the conditions required for the aggregate demand curve to be smooth and sloping down are nearly impossible to be satisfied. It would be fair to say that predicting (let alone manipulating) the economy to do what we want is really a pipe dream. Most of macroeconomics is based on shaky foundations like this.

    I know that there is a temptation to say that the Fed knows all and Uncle Ben will take care of us. It would be comforting to think that a PhD qualifies one to direct the economy. There is no one in the world with that qualification.

    Granted, Uncle Ben may be smarter than you, but that is just overall intelligence and knowledge. He has mental blind spots where you might not have them. His education might make it easier for him to deceive himself into thinking that he can do the impossible. The identity of the believer does not affect the truth of the belief. Only logic does.

    Cheers.

  • Report this Comment On July 17, 2011, at 12:16 PM, TMFHousel wrote:

    <<Just because a minimum wage employee at McDonalds who has no stake in the profits of her employer refuses to handle the "hassle" of accepting gold as payment does not mean that there are plenty of business owners who will accept gold as payment.>>

    I would be impressed to see data showing any more than a fraction of 1% of businesses accept gold as payment. The McDonalds workers don't deny gold as payment out of hassle. It's out of rule and policy.

  • Report this Comment On July 17, 2011, at 12:47 PM, theHedgehog wrote:

    TypingMonkey: "Is it money today? Yes. Money does not have to be a universal medium of exchange. As long as there are enough people who will accept gold as payment, it is money."

    Could you provide some specific examples of where gold is being used as "money"? I.e. payment is being made and accepted in ounces of gold for some product, rather than the gold having to first be converted to local currency before the payment can be consummated?

  • Report this Comment On July 17, 2011, at 12:50 PM, theHedgehog wrote:

    theHedgehog: "rather than the gold having to first be converted to local currency"

    Eh, that should probably have been "rather than the gold having to first be converted to some mutually acceptable currency".

  • Report this Comment On July 17, 2011, at 1:32 PM, ChemBaby wrote:

    Mr. Economics professor,

    Your words sound so much like my favorite author, Dr. Tom Sowell.

  • Report this Comment On July 17, 2011, at 1:36 PM, TypingMonkey wrote:

    >>1% of businesses...

    This kind of thing is extremely difficult to judge. I would agree with your guess, but that doesn't change my original point that it is a viable medium of exchange and that if the counterfeit risk is low enough, it makes no sense for a rational person not to accept it as payment.

    >>out of rule and policy...

    That's all fine, but the issue is with counterfeiting. It is hard to verify at the cashier whether currency is counterfeit or not. That is to say, the existence of a standardized gold coin (or even better a certificate) would be a different animal from a gold nugget.

    There is no point in quibbling over something like this. Like I said, gold is not universal money today, but it is still a viable medium of exchange (modulo appropriate verifiability). You posted something previously:

    >>In America, yes. Save for its convertibility into U.S. dollars, most Americans would find yen worthless.

    You agreed that Yen is money, just not for certain people. By that same logic, gold is money, too---just not for most people.

    Gold has its own ISO currency code.

    http://en.wikipedia.org/wiki/ISO_4217

    The Utah law that was mentioned earlier actually says that gold coins minted by the federal government (like this http://www.usmint.gov/downloads/mint_programs/am_eagles/Amer... are legal currency. The bill text (at http://le.utah.gov/~2011/bills/hbillenr/hb0317.htm) reads: "This bill recognizes gold and silver coins that are issued by the federal government as legal tender in the state and exempts the exchange of the coins from certain types of state tax liability."

    Also, there seems to be some confusion about gold being an asset. This is absolutely true, but it does not say much. The US dollar is an asset (the most liquid one), too. So are stocks. How do we distinguish between them? The difference is that stocks represent physical capital being used for production (of goods, ideas, services, etc.). The US dollar (and gold) and gold are assets used to store value. You might make money by buying gold as an investment, but you are not making the profit on gold because the gold made the economy more productive. (Of course, you can make profits on stocks in this way, too, but you can also make profits on stocks if the company becomes more productive). Furthermore, if you make an accounting profit in US dollars by buying gold, there is a possibility that you didn't gain anything in real terms because the "profit" is due to the decreasing value of the dollar.

    The real question we should be asking instead of quibbling is whether gold could easily become widely used currency. Based on past history, the answer to that is a resounding yes. I don't see why there is a need to make fun of Uncle Ben or Ron Paul for this exchange (Granted, I think that there are other reasons to make fun of Uncle Ben, but that's neither here nor there).

    Cheers.

  • Report this Comment On July 17, 2011, at 7:01 PM, silvermind wrote:

    Sinch,

    Thanks for the article. Could you link or post your definition of money?

  • Report this Comment On July 17, 2011, at 7:14 PM, wrtraxler wrote:

    Anyone that says gold is not money step forward, I will offer you $1500 in US dollars or 1 ounce of gold..tell me which you reach for?

  • Report this Comment On July 17, 2011, at 7:19 PM, theHedgehog wrote:

    "Anyone that says gold is not money step forward, I will offer you $1500 in US dollars or 1 ounce of gold..tell me which you reach for?"

    I'll PM you my address. You can send a check.

  • Report this Comment On July 17, 2011, at 8:49 PM, TMFGalagan wrote:

    Hey Sinch -

    I think one reason gold advocates and gold opponents don't communicate well is because everyone gets caught up in definitional trivia. It doesn't matter to most investors whether gold is money. They just want it to appreciate against whatever standard they set - dollars, euros, stocks, whatever.

    In practical terms, why does it matter whether gold is money?

    best,

    dan

  • Report this Comment On July 17, 2011, at 9:11 PM, theHedgehog wrote:

    Dan,

    Don't get me wrong: I'm not an opponent of investing in gold although I don't understand herd psychology well enough to do so. It's a precious metal: a commodity that goes up and down. It is unique in that it is malleable to the molecular level (I think), it resists almost all corrosive chemicals whether man-made or natural, it's the best electrical conductor we have, and it pleases our women-folk. I just don't see it as money. =)

    Hedge

  • Report this Comment On July 17, 2011, at 10:05 PM, DarinP wrote:

    Most people on this thread are arguing from the wrong perspective. It makes no sense to argue from the perspective of "gold has value". A lot of things have value (cars, houses, artwork, etc), that doesn't make them "money". The question is: What value does "currency" or "money" have other than as a unit of financial exchange? The answer: None. You can't use money (eg. cash or a bank account balance) for ANYTHING other than as a unit of exchange in a financial transaction. It can't be used in electronics or for drilling (diamonds) or for any practical application other than financial transactions. If I tried long enough, I could probably convince a store owner to take my car in exchange for some goods or services. That doesn't make my car money. For something to be considered "money" and not just something of value, it has to have NO OTHER USE. Money is a representation of value, not value itself. The reason banks hold gold instead of diamonds is because the markets for gold are far more active and liquid than the market for diamonds because the value of a diamond is far more subjective than gold and the market you can sell the diamond into is dependent on the condition and nature of the diamonds you hold. The value of cut diamonds cannot be realized by selling them into the industrial diamond market. Likewise, the value of industrial diamonds cannot be realized by selling them as jewels. Gold is gold. No matter what you do to it, you can always return it to its basic form and sell it into any gold market. Gold is far more liquid and far less subjective an asset than diamonds.

  • Report this Comment On July 18, 2011, at 10:43 AM, Deefburger wrote:

    Beer is money, beans are money, rice is money, wheat is money, all of them are money some place to someone.

    Value is relevant to the individual evaluating. YOU determine value for yourself!!!

    BUT, for something to be highly valued generally, it must be tangible and real, and easily recognized by all to have a value.

    So, How is gold NOT money? It is.

  • Report this Comment On July 18, 2011, at 10:54 AM, FoolsGold36 wrote:

    Gold is only reserve because "Bernanke" says so. What is it reserved for? After all the U.S. prints money. Someone is playing games of chest with the American people. This is ridiculous to run a scam like this. Stop being sheep Americans, it's time to be Wolves!

  • Report this Comment On July 18, 2011, at 11:30 AM, Onigato wrote:

    Many arguments back and forth have said the exact same thing, that in many eyes gold != money.

    I have to agree on the idea that if I have a chunk of gold, minted or otherwise, I probably would have a devil of a time trying to get the cashier at the local burger shop to accept that as payment for my meal. I can't pay my rent in gold, I can't even use cash for that, I can't pay my power, water or gas bills with bullion, and I certainly can't buy stuff on eBay with Au. If I can't spend it anywhere except specific exchange locations, it isn't money.

    But by that same definition, CASH, the almighty US Dollar, is losing it's status as money. Slowly, but it IS losing its abilty to be used as money. I've already stated I can't use cash to pay my rent, and I'd be willing to bet most, if not quite all, mortgages and rental properties have the same policy. Checks, credit or debit cards, sometimes even money orders, but not cash. It is nearly impossible to just walk into an airport these days, plop down a couple hundred dollars cash, and buy a ticket to somewhere. In fact, doing so raises all kinds of red-flag warnings, and gets much more attention taken of you.

    Does that mean that I don't want to have gold or cash on hand? Absolutely not. I would love to have piles of both on hand at all times. Cash has infered value, as long as people agree it does, and gold has the same. People will probably always be willing to find a way to exchange the shiny metal for money, but in America, at this time, gold just isn't money.

  • Report this Comment On July 18, 2011, at 2:50 PM, ouchtouch wrote:

    Two points:

    @typingmonkey, legal tender laws do not require a merchant to accept dollars in exchange for goods. Rather, legal tender laws require creditors to accept dollars in payment of debt. A merchant is free to demand gold or silver or other goods in payment in a real-time exchange.

    Second, you are never going to be able to identify those who currently use gold and silver as money in the USA because they are evading taxes, specifically the 28% "collectibles" capital gains tax that the government imposes on "gains" meaning the difference between the dollar price of gold when you acquired it and when you traded it. Thus nobody will admit to using gold and silver as money in a public forum for fear of prosecution and imprisonment. It is the fact that we are coerced into using dollars by this tax/imprisonment scheme that shows that the dollar is a fiat currency and gold and silver are real money.

  • Report this Comment On July 18, 2011, at 3:22 PM, fishmeluck wrote:

    Typing Monkey did an excellent job of explaining the economic definition of money, by which gold is money. Why is anyone still talking about it?

    Apparently, a few are still stuck on several misconceptions: only legal tender is money, only the official currency is money, only that which is most commonly used in exchange is money, and the strangest misconception of all "only that which has no real value can be money". Those pushing this "gold is not money" line, including Bernanke, are supporting the idea that "money" can be politically and legally defined and forcefully imposed on the population, whether they know it or not. Those who wish to continue their comments in that vein should stand on one side of the room while the adults stand on the other side of the room and continue to make comments based on economics.

    In traditional economic terms, money is theoretically any good which has several properties: durability, portability, scarcity, divisibility, and it should be accepted to purchase goods and services. So, we can talk about the extent to which any particular good has these properties, but it makes no sense to say that any particular good is not money. To do so would be to confuse the economic concept of money with politics or law, i.e., legal tender and the tax code. The U.S. dollar and gold both excel at portability and divisibility. Both are adequate at durability. Gold is superior at scarcity, and the U.S. dollar is superior at purchasing goods and services. However, the latter is true only due to politics, law, and threat of force.

    Ben Bernanke, as a representative of the Federal Reserve banking system, and the politically and legally defined and forcefully imposed debt-based paper money system of the U.S., has a vested interest in publicly defending the value of said money and disparaging the worth and usefulness of alternative monies. If one simple legal change were allowed in the status of gold such that appreciation in the price of gold in terms of the U.S. dollar would be permitted tax-free, the politically and legally imposed advantage of the U.S. dollar as a unit of exchange would melt away, and we would see gold or gold equivalents circulate widely as currency in parallel and competition with the U.S. dollar. The people would be protected from dollar-inflation and dollar-depreciation, and an important constraint would be imposed on the the banking system with respect to potential over-issuance of bank credit.

  • Report this Comment On July 18, 2011, at 4:33 PM, promommyfool wrote:

    Lots of over thinking the question here. Paper money, the gold in my jewelry box, the silver coins I cashed in a while back; they are all valued representative mediums of exchange for other things, and that my friends is what money is all about. Keeps us from trading six chickens for 10 pounds of rice.

    Brings back to mind a story my son learned in history last year. A German woman, during the depression, left a basket of German marks on the sidewalk for a moment. When she returned to it, the cash was still there, but someone had stolen her basket. Paper money is only a medium of exchange as long as people have faith in its value. Apparently, the world over, people are loosing faith in printed pieces of paper and moving to shiny metals instead.

  • Report this Comment On July 18, 2011, at 4:56 PM, Acesnyper wrote:

    @Typingmonkey,

    If you don't mind, where do you teach? This sounds almost word for word something said by a prof of mine.

    (Going for a PhD in econ myself and hoping to be a prof)

  • Report this Comment On July 18, 2011, at 9:19 PM, ikkyu2 wrote:

    If you really think gold is money, try asking your boss to pay your wages in gold. You'll find out what I already know: gold ain't money.

  • Report this Comment On July 18, 2011, at 9:22 PM, ikkyu2 wrote:

    Also, as Chairman Ben surely knows, and as I suspect Paul does too, the central bank of Israel does hold diamonds as a core reserve, and boy did they regret that in the mid-80s when brown Russian ice flooded the world markets and depressed diamond prices. The central bank of Zimbabwe also held diamonds at one time, though nearly anything of value in that country has been plundered by its ruling elite.

  • Report this Comment On July 18, 2011, at 9:36 PM, ouchtouch wrote:

    People confuse the role of gold in inflation. The fact is, gold is protection against negative real interest rates, whether such rates are caused by inflation or deflation or financial suppression, i.e. central banks artificially supressing interest rates. Niall Ferguson has done a lot of work on this.

    http://www.businessinsider.com/niall-ferguson-sovereign-debt...

  • Report this Comment On July 18, 2011, at 10:22 PM, whereaminow wrote:

    ikkyu2,

    You've raised a couple of interesting points so I hope to address them.

    I did not know about Israel's holding of reserve diamonds. I speculate that had Israel's government or economists understood money they would have seen the folly rather quickly. The market demands that money be fungible. Diamonds are not. This is why diamonds never supplanted gold as the world currency.

    The was an important case in America a couple years ago regarding a boss that did pay his employees in gold. He paid them with US mint issued gold and silver coins and reported the tax basis as the face value of the coin, not the market value. The IRS, of course, went ballistic. I think he ended up losing the case, but I'm not sure.

    Now, most employers don't have any gold, so asking them to pay you in it probably wouldn't do you any good. They'd have to go out and get it themselves.

    But there is a very important economic reason why they would still pay in dollars, even if gold were readily available, and that is Gresham's Law. Artificially overvalued money, in this case dollars, always pushes undervalued money out of the market. Dollars are artificially overvalued due to the "faith and credit" nonsense. In economic terms, the dollar has no value because patriotism has no value. Patriotism is psychology, not economics.

    Finally, I want to answer the claim that gold does not do well against inflation. Price inflation is a tough thing to measure. To begin with, the BLS assumes objective utility when measuring the impact of price changes on consumer satisfaction. There is no such thing as objective utility. All human economic values are subjective. You've heard the phrase that one man's sh*t is another man's shinola. Second, the BLS assumes that there is a standard or average consumer shopping car, except no such thing exists. Price rises affect each person differently, because are spending patterns are different. Attempts to create different CPI metrics are slightly less useless, but still a long way from understanding how price changes impact consumers. In short, the BLS uses very crude and barbaric science.

    Monetary inflation, on the other hand, is easy to measure. Monetary inflation is the issuance of paper money beyond the corresponding amount of gold and silver redeemable in that money. In that case, every dollar the Fed issues without gold backing in its reserves is monetary inflation. If you use M1, it would now take the Fed over $8,000 to cover every ounce of gold in reserves. Using M2, that number balloons to over $33,000. That's a lot of inflation! Since the gold ended up in the Fed's belly as a deposit of private property held in exchange for a claim on that property (dollars), one would expect any decision to not return the property would be fraud. Alas..

    The record of gold against price increases is a mixed bag since 1971, depending on your agreement with the quality of the BLS' work. I'll be nice and say it's just fine. That being said, gold certainly held up better than Monetarists or Keynesians thought it would. Both of these schools of thought believed the dollar was holding up gold's price and not the other way around. Fancy math has a way of making economists very stupid. They predicted the price of gold would fall to $8.50-$10 per ounce after the tie was severed. Oops.

    David in Qatar

  • Report this Comment On July 18, 2011, at 10:24 PM, whereaminow wrote:

    shopping car = shopping cart

    although a "shopping car" would be cooler. i'd zip up and down those aisles at 80mph!

    David in Qatar

  • Report this Comment On July 18, 2011, at 10:25 PM, reflector wrote:

    gold is indeed money.

    for the last year or so, i've been paying one of my vendors, a chinese fellow, with 1oz pamp suisse gold bars instead of cash or check.

    kinda painful, paying someone in gold instead of nice, cheap, easy-to-print dollar bills.

    but, i know the merchandise i'm buying will be resold at a profit, so it's ok, i can soon enough use the profits to buy more gold bars.

    as long as i sell the merchandise off faster than the dollar gets inflated away into oblivion...

  • Report this Comment On July 18, 2011, at 10:55 PM, skypilot2005 wrote:

    For what it is worth.

    I know first hand that many years ago, in many places throughout Asia, a pack or carton of Marlboro “Reds” was “money”. Universally accepted for goods and services. Always at a premium to the current value of the U. S. Dollar.

    Interesting discussion.

    Sky Pilot

  • Report this Comment On July 19, 2011, at 2:37 AM, silvermind wrote:

    Chris / Sinch,

    Could you provide a Definition of Money?

  • Report this Comment On July 19, 2011, at 8:16 AM, XMFSinchiruna wrote:

    silvermind,

    Well, definitions of money sure have been in flux over recent generations, though I suspect some of those alterations may prove temporary.

    It seems to me in our consumer-driven economy that folks have come to view money principally as a medium of exchange. That is to say, they consider their ability to spend it far more critical than their ability to save in it. As a culture we have lost sight of the art of saving, substituting what was until recently freely available debt for our prior emphasis on savings. I certainly don't deny that the fiat USD is the official government-mandated currency of the land, but that does not stop me from valuing gold as an alternative, competing currency.

    That is because, as stores of value, fiat currencies have failed miserably. It has been precisely so throughout time, and it is proving so again. If I wanted to press some buttons, I could even reasonably suggest that USD fails to meet the widely accepted definition of money because it has failed spectacularly at fulfilling the portion of the definition that refers to a store of value. Add that to the risks of default, hyperinflation, and the obvious momentum toward further devaluation, and you have a currency whose long-term viability and, indeed, survivability are legitimately in question. Not so with gold, which will persist in perpetuity, will never be subject to debt distress, default risk, competitive devaluation, nor any other ailment afflicting fiat currencies.

    So it's very simple. The USD is money because my government tells me so, and gold is money even though my government tries to tell me it is not. So I spend with one, and save with the other. Each fulfills its particular role quite well. But whereas gold could become earier to spend over time, I don't think any reasonable observer will claim the dollar will become a more effective store of value over time.

  • Report this Comment On July 19, 2011, at 10:55 AM, wrenchbender57 wrote:

    I don't really care if gold is money or not. It can be exchanged for money so it can act like money in a way. But the real question is do I want to own it and what benefit with it provide if I do own it? I think dividend paying stocks are a better bet than gold. But, if we had a total financial breakdown it may have a beneficial value. However, in that case it might be difficult to exchange for goods. Food or shelter might be a better medium. After all, you can't get much nutritional value from eating gold.

  • Report this Comment On July 20, 2011, at 1:53 PM, SteelReserve wrote:

    To pretty much everyone here -- Thanks! This lively discussion has added quite a bit to my understanding (or lack thereof) of gold and it's relationship to dollars, etc.

  • Report this Comment On July 20, 2011, at 5:41 PM, wasmick wrote:

    Hedge,

    Don't bother.; This is an ideaological discussion, not a fact based one.

    Accept that gold is money. And silver is money. And oil. And salt. And platinum. And beads. And services.

    Interestingly, the same folks who demand that gold = money, do not support the idea that all of the other mentioned commodities are money as well.

    And that's really all you need to understand about that argument. It's not based in logic.

  • Report this Comment On July 20, 2011, at 5:48 PM, wasmick wrote:

    "Anyone that says gold is not money step forward, I will offer you $1500 in US dollars or 1 ounce of gold..tell me which you reach for?"

    I'll send you my address. Mail me the check.

  • Report this Comment On July 20, 2011, at 5:49 PM, XMFSinchiruna wrote:

    wasmick,

    Do central banks hold salt within their foreign currency reserves? Does the BIS conduct currency swaps denominated in beads? Has Alan Greenspan stated that oil "still holds reign over the financial system as the ultimate form of payment"? Does the U.S. Mint issue official coinage made of services?

    If you're going to bemoan a paucity of logic within the debate, and least bring a morsel of it with you to the table! That was weak.

  • Report this Comment On July 20, 2011, at 7:03 PM, wasmick wrote:

    "Does the U.S. Mint issue official coinage made of services?"

    Pennies are currently made of plastic and my logic is weak? Ooooooooookay!

    TMFSinch,

    We've spoken on this subject before so we shan't argue again (because it ended very amicably last time and I'd hate for that to change now).

    Just because you don't like the logic doesn't make it unsound. All of the things I mentioned have been used as money. No one - and I mean no one - is going back to a gold standard, so let's accept that:

    1) illogically human kind continues to have an unusual attraction to gold and gold - more than most other commodities or precious metals - acts as a proxy for money

    and

    2) gold has value, particularly as a store of value, which is a purpose it cyclically serves very well, especially during times of uncertainty and currency upheaval

    More than that, I can't give ya..

  • Report this Comment On July 21, 2011, at 1:37 AM, TheDumbMoney wrote:
  • Report this Comment On July 21, 2011, at 1:58 AM, TheDumbMoney wrote:

    "as stores of value, fiat currencies have failed miserably. It has been precisely so throughout time, and it is proving so again. If I wanted to press some buttons, I could even reasonably suggest that USD fails to meet the widely accepted definition of money because it has failed spectacularly at fulfilling the portion of the definition that refers to a store of value. Add that to the risks of default, hyperinflation, and the obvious momentum toward further devaluation, and you have a currency whose long-term viability and, indeed, survivability are legitimately in question"

    We have had relatively gentle inflation in this country for a long time, including now. The whole point of an elastic currency is to devalue slightly over time -- if it is run well. I continue to fail to see why that is upsetting. That encourages either spending (good for economy) or productive investment (good for economy). What it discourages is unproductively holding cash in a mattress. Anyone holding an index fund for a significant amount of time has crushed inflation in this country, if measured over a significant amount of time (i.e., not from the top of the internet bubble eleven years ago, or the top of the housing bubble four years ago, but over a twenty or thirty or forty year period). Anyone holding only high quality stocks carefully selected for a combination of value and growth has done even better. The stated policy of our central bank for some decades has been to let our currency mildly depreciate. This is not news. It forces you either to spend, or to think. And nobody loses the value of their money over long terms because nobody is stupid enough to hold fiat cash in a drawer for thirty years.

    I think gold is a great trade. I very much wish I had thought of it in 2001 or in 2008. I think that if we see a QEIII, it will go above $2000. That would be a 33% gain, which would be great. But then what? Will it go to $5000? $10,000? Only if the currency does collapse or Ron Paul does convert us to a gold standard. I do not see those things happening, at all. (If it looks like that will happen, I'll think the world is stupid, but I'll gladly buy gold at $3,000/oz or so on the way up and reap a milder but still significant gain.) In the absense of that, such a 33% gain over the next year pales in comparison to what I think can be earned, I think on even something like MSFT LEAPs with a 1/2013 expiration date, or an investment in AAPL. I own multiple stocks that are up more than gold is in the last year. My MSFT LEAPS are up 90% in the last month. I may be wrong about my investment choices, and lose my money, but it won't be because of an inherent problem with our currency, it will be because I have cogitated badly.

    Again, the whole point of a "fiat" or elastic currency is to depreciate mildly, thus encouraging either spending or productive investment in bonds or equities. It is NOT a store of value over a long period of time. That has never been its point. On the other hand, the U.S. dollar has not to my knowledge ever experience a short-term one-year DROP in value equivalent to drops that have previously been seen in gold in the early eighties, or even in 2008/2009 (so put that in your store of value pipe and smoke it). As a short-term store of value, the U.S. dollar is a remarkably stable instrument. That is all it is intended to be.

  • Report this Comment On July 21, 2011, at 2:29 AM, Willametteman wrote:

    I had to join in this discussion. Hedge, you are wrong.... Gold is now being accepted as collateral in certain banking institutions. I put my money where my mouth is... I have made tons of United States Reserve Notes from my gold stock positions. Gold is money and most likely will be part of the basket of currencies, along with some commodities, along with the Chinese Yuan, U.S. Dollar, Swiss Franc and other strong currencies. Currently I would much rather have a store of energy in the the value of gold than in paper currencies. However, that could change relative to the world. In fact, fancy colored Diamonds may be extremely hard to sell but may be much easier to leave the sovereign state of the U.S. than other forms of currency, precious metals or other commodities. The point is, I don't set my ship on any one commodity or currency. The world is changing and we'd all better get used to it.

  • Report this Comment On July 21, 2011, at 3:25 AM, silvermind wrote:

    Sinch,

    Thanks for the answer and your patience with those who wish gold was not money. I was also thinking of the 5 or 8 or how-many-it-is characteristics of money. The more characteristics of money a medium of exchange possesses the better it serves as money. Portable, divisible, durable, universally recognized ...

  • Report this Comment On July 21, 2011, at 8:25 AM, XMFSinchiruna wrote:

    dumberthanafool,

    First, let me say that was a very well presented and cogent comment above. Nicely stated. That's not to say I share the same perspective, but I appreciate the well defended alternate perspective as a valuable contribution to the debate.

    I would point out, however, that as explicit as you say it has been this targeting of dollar devaluation over time, there has also transpired a bizarre public sideshow wherein every administration in my lifetime in succession has explicitly touted a "strong dollar policy" without ever succeeding in that supposed endeavor. Incredibly, despite decades of universally broken promises in that respect, the public goes on accepting the message as if it were a real underlying policy goal.

    Also, with additional rounds of quantitative easing, the the very protracted nature of the easy monetary policy stance overall, comes an increasing risk that inflation down the road will not in any way resemble the trailing inflation that you characterized as gentle. You may believe that Bernanke has everything under control ... but I most certainly do not.

    On a broader philosophical level, I do not consider the current model you describe as an attractive nor sustainable one. It all strikes me as artificial, and therefore prone to large market dislocations and overall instability. I am uncomfortable with an economic structure that relies so heavily upon consumer spending, and my concern is a amplified many fold when that spendiing is induced in part by the devaluation of currency. I trust only organic demand as fuel for sustainable growth, and consider induced demand a dangerous calculation by meddling policymakers. This underscores the nature of our currenct predicament, where further easing is guaranteed in my opinion because relative austerity would remove the induced portion of consumer demand, and illustrate that our economy can not stand on its own two feet without the constant supply of artificial fuel derived of these and other measures.

    I reject as wholly unnatural and unsustainable the type of economic growth we pursue in this country by means of ceaseless currency devaluation, deficit spending, warmongering, obscene leverage, and now the life support of misguided stimulus and high-stakes quantitative easing. The model may have seemed to work for a time, but I contend the ongoing financial crisis serves as sufficient evidence that the apparent success concealed the growth of a monster capable of ripping it all to shreds. Someday, this artificially inseminated economy will delever, and the easing designed to delay that scenario only exacerbates the scale of the event.

    So that's the problem I see with your contention that currency debasement is acceptable because index funds or shares of Apple will carry the day. Apple is a terrific stock, but when an entire economy at large faces structural risks, those risks carry through to those assets quite directly. The whole idea of savings, in my opinion -- of building a nest egg, so to speak -- is to build one that will not lose value under any circumstances.

    And that is where gold comes in, because A.) gold will never go to zero, and B.) gold is the clearly viable alternative to cash in a zero-bound interest rate environment with huge risk of a worsening currency crisis over the next several years. In the meantime, I remain actively engaged in the stock market with an emphasis on gold and silver miners. Like your MSFT LEAPS, many of these stocks have performed admirably over recent years, and adding a powerful growth component to the underlying strategy of retaining exposure to gold and silver.

    So much more to say, but I have to get to work. Anyway, thanks for posting the quality comment that made me want to zoom out to the broader philosophical perspectives underlying this contentious debate over gold.

  • Report this Comment On July 21, 2011, at 10:45 AM, decbutt wrote:

    The simple answer to this question: is gold money is "NO"

    Because you can't "spend" gold.

    Gold buggers remind me of REIT buggers precrash.

    Every single item that reinforces their view is championed, anything that argues counter, is derided, & even more-so if valid.

    And all the facts are distorted to fit.

    "Utah is excepting gold as a currency 1!!!111!!!one"

    No. You can get a card that pays IN DOLLARS vs the DOLLAR VALUE of your gold holdings.

    Gold is not a currency because you cannot use it as a currency.

    In order for it to be used as a unit of exchange, its value must first be calculated in an actual currency, such as USD.

    It is a useful and desirable bartering metal, but unless you can be sure that

    a) It's purity is correct

    b) it weighs exactly what it should

    c) and so has the right mass

    no one would accept a lump of metal at face value in the same way that they can accept cash. And if they did accept gold in exchange for goods or services, how do you expect that they would make change?

    In money.

  • Report this Comment On July 21, 2011, at 10:53 AM, decbutt wrote:

    Oh and PS -

    Gold is valued highly right now. How many gold buggers were busy buying tons of the stuff when it was cheap? How many were extolling the virtues of gold as "money" in 1996? Not many.

    What's changed since then?

    Gold's value has risen.

    But if "gold is money" then gold is ALWAYS money. Its status as money or not money is not conveyed upon it by it's valuation relative to other currencies.

    It either is money, or it is not.

    So it is not.

    The fact that people are getting rich off it is clouding thinking, which is always dangerous.

  • Report this Comment On July 21, 2011, at 11:45 AM, XMFSinchiruna wrote:

    "But if "gold is money" then gold is ALWAYS money. Its status as money or not money is not conveyed upon it by it's valuation relative to other currencies."

    Agreed.

    "The fact that people are getting rich off it is clouding thinking, which is always dangerous."

    Ridiculous and unsubstantiated.

  • Report this Comment On July 21, 2011, at 7:08 PM, 123spot wrote:

    Sinch @8:16. Good, well resoned, and then there is the universal "but". If I am hungry, I cannot eat money. Money will not save my child in a drought. Real value will always lie in what is useful, not what can be thrown at someone's feet in an existentially empty gesture. Food, water, music--my kind of money. Can nourish and be shared. We'll make a small calf with your offering. Hope it is pretty.

  • Report this Comment On July 22, 2011, at 2:34 AM, TheDumbMoney wrote:

    Sincheruna, thank you too for your respectul response. Here is my reply. Feel no need to reply to me, and I can't promise I will reply again, as I am on vacation with limited and sporadic access to a computer.

    "wherein every administration in my lifetime in succession has explicitly touted a "strong dollar policy" without ever succeeding in that supposed endeavor...Incredibly, despite decades of universally broken promises in that respect, the public goes on accepting the message as if it were a real underlying policy goal"

    RESPONSE: The "strong dollar policy" is a policy referencing the relative value of the U.S. Dollar and other currencies. That is a distinct and largely separate issue from the mild targeted intra-U.S.depreciation of the dollar's purchasing power, within this country, via mild 1-3% internal inflation. This latter issue is what I was talking about. The "strong dollar" issue is only related in the sense that if our currency is abused, the dollar could be artificially-devalued against other currencies. Thus, the "strong dollar policy" is a statement that we will not manipulate our currency (as China does), solely for the purpose of beggering our neighbors. In my conception, an elastic or fiat currency, properly used, is like the rudder of our ship. The captain (Bernanke) makes changes (it is elastic) to account for new currents, winds, rocks, panics, euphorias, but the purpose of these changes is to keep us on a straight and steady course, at least as much as is humanly possible, since no Fed Chairman is God. A true violation of the "strong dollar" policy, by contrast, would be using the rudder to deliberately zig and zag; which we have promised not to do, and have (in my view not done).

    Our mild internal inflation has creaed the incentives I spoke about before, with regard to internal U.S. spending and investment.

    That is not to say the dollar has not depreciated against other currencies as well. It has. But while the central bank tries to keep the ship on a steady course, that is a relative action taken separate from, but always shackled by, the constraints of substantive policies enacted by our legislative and executive branches. In that broader substantive context, in my conception, in the long term the currency value depends ultimately upon the stability of and productivity of the issuing country. (Interest rates are short term impacts, though significant ones.) Thus in that long term we are seeing a decline in our currency relative to other currencies; one can view that as caused either by our decline (education levels, productivity, etc.), or by the relative extent by which the rest of the world is catching up to us. I think the latter is a more accurate description of the world. While we are still growing, and will continue to grow, and while our productivity is still increasing, that of the rest of the world, particularly the developing world, is (albeit from a much lower basis point) increasing much more quickly. Thus, regardless of the actions of our central bank, it is inevitable that we will see decline of the value of the dollar relative to these other currencies, assuming that the issuing countries remain relatively stable, and they their central banks use their currency rudder to stay their courses rather than to the zag.

    The whole issue is further confused by the fact that Congress, in its infinite lack of wisdom, has given the Treasury responsibility for the "strong dollar" and value of the dollar (which value the Treasury does totally control!) and has given the Fed a mandate on employment (which the Fed does not in reality control, for the most part!). Thes are artifacts of the stupidity of Congress, and smart men like Bernanke and Geithner have to operate within the linguistic constraints within which they have been shackled.

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    "Also, with additional rounds of quantitative easing, the the very protracted nature of the easy monetary policy stance overall, comes an increasing risk that inflation down the road will not in any way resemble the trailing inflation that you characterized as gentle. You may believe that Bernanke has everything under control ... but I most certainly do not."

    RESPONSE: While it is profane and non-professionally-written, I believe this post (http://caps.fool.com/Blogs/why-i-love-ben-bernanke-and/60732... sums up my view here. I do not know for sure that Bernanke has everything under control, but I do know that: 1) increasing the rate paid on excess reserves; and 2) increasing the fed funds rate are powerful tools to "turn the rudder" and end any excessive inflation. My level of confidence is not high that the Fed can absolutely maintain a 1-3% rate, but my level of confidence is very, very, very high that the Fed can prevent inflation from ever rising above approximately 7-10% for any length of time.

    ------

    " I do not consider the current model you describe as an attractive nor sustainable one. It all strikes me as artificial"

    RESPONSE: I agree wholeheartedly that it is artificial. However, a system in which the amount of our currency is ultimately defined by the amount of gold or silver that companies mine from the ground is, in my view, equally artificial, or alternatively, as would be a system in which the government would have a manipulate that currency status of gold or silver via official coinage.

    ---

    "I reject as wholly unnatural and unsustainable the type of economic growth we pursue in this country by means of ceaseless currency devaluation, deficit spending, warmongering, obscene leverage, and now the life support of misguided stimulus and high-stakes quantitative easing"

    RESPONSE: With respect, this appears to be a conflation of certain substantive governmental rules and regulations with the issue of currency. For example, the level of our warmongering or the leverage at which banks have been allowed to operate has nothing to do with our currency. Neither does the leverage of our country, which has to do with (in my view) a disconnect between what we want and what we are willing to pay, and is also a result (also in my view) of deliberate Republican attempts to "starve the beast" by reducing taxes without reducing spending, the end-point of which such policy we may now be reaching.

    -----

    "And that is where gold comes in, because A.) gold will never go to zero, and B.) gold is the clearly viable alternative to cash in a zero-bound interest rate environment with huge risk of a worsening currency crisis over the next several years"

    RESPONSE: I agree with this. Gold has been traditionally accepted as money for thousands of years. Of all of the "moneys" (beads, shells, guns.,) it is by far the most-commonly accepted and used. In other words, if society were to collapse, guns would be immediately valuable, but as soon as food and women were acquired, they would VERY shortly be used to acquire gold! Your comment about the zero bound of inflation is also true: with interest rates so low, there is no penalty for holding gold, which does not produce a return on equity, or a dividend stream. (While gold miners do, the tail wags the dog there, because it all depends upon the price of gold.) This exposes the risk of gold as a long-term holding from here. However, in the short-term (2-4 years) there is likely little risk, because the extent of our deleveraging-caused-near-delfationary environment will cause the Fed to keep interest rates quite low for an "extended period of time."

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    " I am uncomfortable with an economic structure that relies so heavily upon consumer spending, and my concern is a amplified many fold when that spendiing is induced in part by the devaluation of currency."

    RESPONSE: That response assumes people will only spend as a result of the incentive-structure of mild inflation. Historically, that is not true. It is also an "economic structure" that relies so heavily on investment. And that investment is incentivized by our structure. To the extent that John Q. Public over-spends, rather than investing, that is caused by three things: 1) substantive economic polices (by which I mean legislative/exucutive policies) that have left them unable to enough money that they have any to invest, beyond their basic monthly spending needs; 2) their own stupidity and failure to sufficiently educate themselves; and 3) related to two, insufficient education about the benefits of investment. None of this, in my view, relates to our currency type.

    ------

    "I trust only organic demand...."

    RESPONSE: I am not convinced any such thing exists. As a matter of fact, I am pretty sure it does not. If "organic demand" existed, the entire advertising industry would be pointless. A large part of the advertising industry is devoted to getting us to by products we don't "need" or have "organic demand" for. Is there any such thing as "organic demand" for a pop star, or for twinkies? Perhaps it depends upon how you define "organic demand." More fundamentally, I think I have a bit less faith in the indivuality and rationality of humans than you do, perhaps. We are hive animals, subject to all kinds of irrational nonsense trends and fads. The currency rudder is intended to steer us left when our panic sends us right, and to send us right when our euphoria sends us left. (It is unsurprising, consequently, that many of the people who have great respect for the Fed have absolutely zero faith in the concept of "efficient markets," among which people I am one.)

  • Report this Comment On July 22, 2011, at 11:18 PM, PonderingItAll wrote:

    Everybody who claims the US dollar is fiat currency is just wrong: It is specie currency, but the precious metal is not gold or silver. It is nickel!

    You can convert any form of US currency into or out of nickels. You can spend them for their face value. And the melt value today of all circulated American nickels is at least 6.6 cents. (Yes, that's right: The metal content is worth about 10% more than the face value.)

    Nobody hoards nickel (driving up the price), so all of the metal value is based on its use in industry. That value is not going to decrease any time in the near future.

  • Report this Comment On July 23, 2011, at 10:19 PM, jj432 wrote:

    If gold is so awesome and US dollars are so terrible, why do the people who have the gold sell it to get dollars?

  • Report this Comment On July 26, 2011, at 11:14 AM, ctorre wrote:

    Gold is not money, It is currency. Anything excepted for payment or exchange is currency. Money is a type of currency.

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