Fed’s Bernanke said Gold is Not Money, But is He Right?

During his bi-annual monetary testimony before Congress, Federal Reserve Chairman Ben Bernanke was confronted by none other than die-hard Libertarian Ron Paul.

Paul asked Bernanke if gold was money. Bernanke said no, it's actually a precious metal.

Paul then asked him why the Federal Reserve holds gold and not, say, diamonds. Bernanke chalked it up to tradition.

Although the Paul-Bernanke exchange was amusing, the question of whether or not gold is money is a serious one, especially in light of Bernanke's ultra-loose monetary policy, program of QE2, and the slight possibility that he'll role out QE3.

Gold is undoubtedly a store of value, just like any other asset (like a glass bowl, for example).

Gold, however, is perhaps one of the best stores of value because it's divisible, finite, virtually immune to decay (i.e. storable), and not heavily used in industrial applications. It's held its value since civilization began.

The question, however, is if gold itself is money, i.e. a viable medium of exchange.

Historically, gold (and silver) has long served as a medium of exchange in the form of gold coins. Currently, there are gold and silver coins in circulation (minted by the governments U.S. and Canada, for example) that afford people the mobility of a currency.

Utah has already passed a legislation that treats gold coins based on the market value of gold (as opposed to the nominal value printed on the coins). If people really start to question the value of the dollar, they can very well start demanding gold coins.

But what about jewelry? They also store value. Plus, they're lighter to carry, as 'Bond God' Jeffrey Gundlach pointed out in a Business Insider interview. Moreover, in times of war, jewelry often proved more useful that gold for civilians.

However, jewelry is a tool of barter, not a currency. Its lack of standard measurements and precise divisibility make it a worse currency (or not one at all) than gold.

The truth is that gold is already a currency in a limited capacity. Should the world lose more faith in fiat currencies, gold is unquestionably the number one alternative choice.

That's why central banks and many of the savviest investors are buying up some gold just in case. That's why gold prices are correlated to fear.

That's why Bernanke should regard gold prices as one of his primary report cards, regardless of whether or not he thinks it's money.