Gold Currency – An Escape From A Failing Paper Money System

Fed Chairman Bernanke’s statement that “gold is not money” seems to be an increasingly lonely position.  No less an authority than Alan Greenspan, his predecessor at the Federal Reserve, directly contradicted Bernanke by calling gold a “currency.”

In remarkably candid language, Greenspan spoke in Washington about the Euro ‘Breaking Down’, the European banking crisis and the deterioration of the fiat money system.

“The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today in Washington.

A lack of confidence in euro-denominated debt is straining the region’s banks, Greenspan said. “That stuff has always been thought of as the ideal collateral and now it’s getting highly questionable,” he said in a question-and-answer session at the Innovation Nation Forum in Washington.

Greenspan also said that he did not think gold, which reached a record above $1,900 an ounce this week, was in a bubble.

“Gold, unlike all other commodities, is a currency,” he said. “And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

While Bernanke contemplates additional ways to debase the US currency his counterparts at other Central Banks are retaining gold to help manage debt and adding to their gold reserves at a record pace.  Meanwhile, before providing more bailout funds to insolvent member of the European Union, the German labour minister is demanding that gold be put up as collateral.

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said in an interview. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

“Under conditions of austerity we’re going to see a further deterioration of debt,” said Richardson, who has studied metals markets for 20 years. “Rising risk argues in favor of holding on to their gold reserves rather than selling them because they’ve only got one shot at selling.”

“The European central banks won’t sell their gold because while it may be a means to raise cash, it definitely won’t be enough to settle their debts,” said Duan Shihua, head of corporate services at Haitong Futures Co., China’s largest brokerage by registered capital. “Besides, none of the central banks believe in the currencies of other countries.”

Bernanke can deny reality and history by saying that gold is not money while he wildly prints more paper currency, but the rest of the world isn’t buying it.