Is gold money? The Republican presidential contender Ron Paul asked the question of Ben Bernanke the last time the Federal Reserve chairman appeared before Congress, and the bearded guardian of America's monetary policy feigned to look perplexed by the very idea. "No," he said, after a long pause. "It's a precious metal."
But the question was no bizarre intervention from left-field (or more accurately, in Congressman Paul's case, from right-field). It was 40 years ago yesterday that gold ceased to be money, and an intellectual ferment in politics and financial markets is debating if it might already be money again. "Buy gold, it's a currency," say commentators on cable television. Small investors are obliging, joining with speculators and long-term investors to fuel an extraordinary rise in the gold price.
The metal of kings and gods long ago passed its previous highs in US dollar terms. If you adjust for inflation or the declining international value of the dollar, it still has a way to go to reach its 1980 peak in real terms, but no one is certain now that it won't get there. Gold is a haven for investors panicked by the prospect of a new financial crisis out of Europe, or worried that monetary stimulus in the ailing economies of the West will stoke inflation, and – increasingly – for speculators who think that it might one day recapture a pivotal role in the global financial system.
It was Richard Nixon who declared that gold was no longer money. On 15 August, 1971, the president went on TV to tell the American people he would "suspend temporarily the convertibility of the dollar into gold". It was a devaluation moment, akin to Harold Wilson addressing the British on "the pound in your pocket" or Norman Lamont appearing outside the UK Treasury to announce that sterling was leaving the European Exchange Rate Mechanism.
But it turned out to be much more than a devaluation moment. It was the end of the post-war monetary system in which the US dollar was pegged to gold, a peg based on the promise that foreign central banks could convert their dollar holdings into gold should they wish. Henceforth, the value of the US dollar would be based not on convertibility into a fixed amount of gold, but on faith in the strength of the US economy and the credit of the US government, as measured by the global financial markets.
The effective collapse of the Bretton Woods agreement on that day in 1971 replaced a rigid system that had been blamed for a succession of monetary crises with a new and more flexible one. It freed the US to devalue its currency against the rest of the world, boost its manufacturing sector and inflate away the debts racked up in Vietnam, but it also triggered inflation shocks such as the oil crises of the 1970s, in which Opec nations demanded more devalued dollars per barrel.
Forty years on, the dollar reserves piled up in foreign central banks fluctuate with the market, which is why central bankers are increasingly eyeing the state of the US government's finances, and the dangerously fractious nature of its politics, with concern. Many decide that there is no alternative to holding the dollar. The yen is hamstrung by Japan's stagnant economy, the euro is in crisis, and the Chinese yuan is not yet freely tradeable. Mohamed El-Erian, the chief executive of the bond investment manager Pimco, likens the situation to having to choose "the least dirty shirt" to wear on the last day of a business trip.
But some central bankers are looking to gold as an alternative. In June, after a 13-year hiatus, South Korea made gold a meaningful proportion of its reserves by buying $1.3bn of the stuff. The World Gold Council reports that central banks as a whole added 208 tonnes to their reserves in the first half of this year, putting2011 on course to outstrip the previous record year, 1981, by about 50 per cent.
That confrontation between Ron Paul and Ben Bernanke didn't end with the Fed chairman's "no". Mr Paul followed up by asking why, if it was not money, central banks held gold at all. "Tradition," Mr Bernanke replied. "It's an asset. I don't think Treasury bills are money either... The reason people hold gold is as a protection against what we call tail risk – really, really bad outcomes – and to the extent the last few years have made people more worried about the potential of a crisis, then they have gold as a protection."
Mr Paul, of course, came second in the Iowa straw poll of Republican presidential candidates over the weekend, and commands a powerful army of youngsters, often students, who adhere to his view that the US lost its way when it repudiated gold in 1971. In the absence of a gold standard to peg currencies to, they become the playthings of governments, they believe. The problem is that the physical nature of gold makes it imperfect as a currency for a global economy operating on a huge scale and at a high speed.
Some forward-looking central bankers are debating whether "special drawing rights", SDRs, the synthetic currency used by the International Monetary Fund for its internal transactions, might take on a bigger role.
SDRs are calculated from a basket of real-world currencies, including the US dollar and the euro. When its composition is next up for review in 2015, don't be surprised if right-wing economists push for gold to be included in that basket of "currencies".
Lure of the nugget
* Fancy a 2.5 gram gold bar stamped in Switzerland with the picture of a beautiful woman? Yours for $179.97. A shining nugget of 24-carat solid gold to start your treasure collection? Yours for just $30. Scrolling down the list of offers available is as exciting as perusing a catalogue of exquisite chocolate bars.
The lure of gold has become so strong that eBay has got in on the act. The auction site created a special "Bullion Centre" to help buyers and sellers find each other, and investors have been flocking to the site since its opening in May. Reports suggest that interest surged further during the market turmoil of the past week.
"When people are coming down to the question, 'Do they want to have cash in the bank or gold in their hands?' the answer is they'd rather have gold or silver," Jacob Chandler, of Great Southern Coins, the largest seller of precious metals on eBay, told the Associated Press.Reuse content