Memo To Ron Paul: Gold Is A Fiat Currency (GLD, SLV, SGOL, AGOL)

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February 6, 2012 3:48pm NYSE:AGOL NYSE:SGOL

Jonathan Yates: Congressman and presidential candiate Dr. Ron Paul has spent most of his career advocating a return to the gold standard (NYSEArca:GLD).  He feels that replacing the yellow metal with paper is the source of many economic woes that returning to gold could fix. There’s just

one problem with his plan: he’s wrong.

He’s wrong because gold has almost no value except as an investment.  While about half of the world’s silver (NYSEArca:SLV) is used in industry, well over 90% of gold is only for investment purposes.   In that regard, it is no better than paper money. [Related: ETFs  Gold Trust (NYSEArca:SGOL), ETFs Asian Gold Trust (NYSEArca:AGOL)]

A currency is whatever is accepted as a medium of exchange.  It can be paper money or gold.  For it to be accepted, the recipient has to be assured that it has the desired value for the good being exchanged.  For paper money, that comes from the imprimatur of the issuing government.

That is just as true for gold.  It is only the backing of governments that gives gold any value.  And as University of Chicago economist Richard Thaler, remarked in a recent New York Times article, “Why tie to gold? Why not 1982 Bordeaux?”

Gold also has more storage and transportation costs than our present currency, which mostly exists as numbers in computers. To defend his call for the gold standard, Dr. Paul says gold does not have to be transferred in exchanges in its physical form: it can be done electronically or in paper certificates.

We already have a way of performing that kind of exchange. It’s called money.

Written By Jonathan Yates From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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