Federal Reserve Chairman Ben Bernanke was once confronted by Ron Paul with the now famous question, “Is gold money?” Bernanke replied “no” and said central banks hold the precious metal as “tradition.” However, the Central Bank of Iran appears to disagree with Bernanke and is substituting gold for U.S. dollars.
Due to sanctions placed on Iran by the United States and the European Union, Iran is relying more on gold for international trade. On Tuesday, Mahmoud Bahmani, the governor of Iran’s central bank, said the country is ready to receive payment for oil supplies in gold without hesitation. Iran has the world’s third-largest oil reserves. Furthermore, Iran recently used to gold in order to import food, since other financial assets were frozen. Earlier this month, one European trader said, “Grain deals are being paid for in gold bullion and barter deals are being offered. Some of the major trading houses are involved.” Another trader explained, “As the shipments of grain are so large, barter or gold payments are the quickest option.”
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It is important to realize that precious metals are not only the quickest option, but also the most traditional. Thousands of years worth of history have proven gold and silver to be the longest running form of money. Gold and silver meet three specific requirements of real money: It acts as a unit of measurement, as a medium of exchange and as a store of value. John Tomlinson from Honest Money explains, “The commodity used most successfully for money to date has been gold. By its very nature it is almost ideal. It is scarce. To produce a small amount of it requires a large expenditure of human energy. It is homogeneous and therefore can be divided into small amounts of identical size, quality and exchange value. It is inert: it does not physically deteriorate, so it does not inherently lose value.”
Additionally, gold and silver do not contain counterparty risk and can not be printed at will. While fiat currencies are merely backed by confidence in governments, precious metals are backed by history and scarcity. It takes an enormous amount of time and energy to mine gold and silver, the same can not be said about fiat currencies. The MF Global collapse proves counterparty risk is alive and well in financial markets, while today’s most recent long-term refinancing operation shows central banks are still willing to prop up the current insolvent financial system.
On Wednesday, European banks borrowed a record amount of three-year cash from the European Central Bank. Around 800 financial institutions came to the ECB to borrow 529.5 billion euros. In comparison, the first LTRO had 523 banks borrowing 489 billion euros. “Whether this is the ‘final’ LTRO as indicated by ECB or not will become the true indicator,” Steen Jakobsen, chief economist at Saxo Bank wrote in a research note. “If this was the last one then history tells us that ending access to extremely easy money should see risk-off, if however the market sees through the ECB and know they will do more as the economic situation deteriorates, then this is merely another step towards explosion of the ECB balance sheet which short-term is very good, and long-term risks inflation and debasing,” Jakobsen added. Since central banks around the world are already in a race to the bottom with fiat currencies, it is extremely unlikely that this will be the last expansion of central bank balance sheets.
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