Is Gold Money?

There was a interesting exchange between Ron Paul and Fed Chairman Ben Bernanke in July, 2011 when Ron Paul asked Ben Bernanke "Is Gold Money"? Bernanke was stumped for a couple of seconds and answered no. He then proceeds to ask why do central banks hold gold reserves for which Bernanke says "It is tradition". The fascinating exchange between two of the most powerful persons in the world financial industry can be viewed below

So, let us look at this age old concept of hoarding gold.

Is gold money today?

To answer this question, let us consider the scenario where you take an ounce of gold and go to BestBuy and buy a 60" television and a Chromebook and decide to pay using gold. Will the cashier at BestBuy accept gold? And will they give back the change in form of gold?

The answer is no. The reason is money in today's day and age is accepted in the form of a dollar bill (in United States and other currencies worldwide) and is an accepted means of transaction involving goods and services. So, why do central banks hold gold reserves? And in some countries such as India, why do people buy gold in large quantities and for special occasions?

This is both tradition and an asset. It is tradition in the sense, gold was used as a form of money since about 6000 years ago and even today in Asian countries gold exchanges hands during marriage as a form of dowry. However, gold is not money. It is an asset as are other financial assets. So, why does the price of gold fluctuate?

I mean, gold is a metal after all. There is no dividends associated with gold (unlike common stock or other financial assets) and neither do companies hold gold reserves. To answer this we must understand that gold is priced in a dollar. As the value of a dollar fluctuates, so does the value of the asset priced in that dollar as well. Yes, of course there is demand and human perception of the value of gold. Nevertheless, as the value of a dollar fluctuates, keeping all things same, so does the value of gold.

The next time you come across gold prices or read about gold reserves, remember gold is not money and it is a tradition to hold gold as an asset.

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