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 is 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.
During our graduate school days when monetarism was in crisis as the relationship between money supply figures and GDP started to unravel, the Fed toyed, or at least, researched the possibility of including equity mutual funds in the money supply figures. During the dot.com boom, for example, stock options were widely used in Silicon Valley as a medium exchange. Stories of restaurants and other vendors taking stocks options as a means of payment from start-ups were widespread. Furthermore, the ease at which homeowners could convert their equity into purchasing power – the “Housing ATM” – also made even the most illiquid of assets a form of money during the height of the bubble.
This illustrates how difficult or even impossible it is for central bankers to pursue a stable monetary policy and the danger of the unintended consequences of negative real interest rates. Monetary policy is, at best, a “black box”, in our opinion, and it’s about time the academics, who justify every commodity or asset price spike (including housing) as a result of the “fundamentals,” start to humble themselves and admit that it is so.
One last point. We do agree with Chairman Bernanke that gold’s intrinsic value is steeped mainly in tradition, has limited practical use, and has value only if it is perceived to have value. After all, at the end of the day “you can’t eat gold.”
This is why here at Global Macro Monitor we are among those who believe gold is beginning to share its store of value status with other commodities, such as energy and foodstuffs, which have a more intrinsic and practical value. As we mention above, the growing ease at which one can hold commodities and convert them to purchasing power will accelerate this transition.
Quantitative easing therefore becomes much more difficult as gold, a relatively benign store of value, where relative price spikes hurt a limited population, shares its store of value status with other commodities, such as food and energy. Relative price spikes in these commodities are not so benign, however, and can, and have, toppled economies and governments. Godspeed, Ben Bernanke.
(click here if video is not observable)