At a hearing last year, Ron Paul asked Ben Bernanke if gold is money. Answer: No. So why do central banks hold it as a reserve? Answer: Tradition.
Gold, as we've said before, is weird. People still think of it sort of like money. Central banks around the world still hold gold alongside actual currencies like dollars, euros and yen. And they're adding to their gold reserves at a rate of hundreds of tons a year worldwide.
A gold industry group recently suggested that Portugal and Italy use their gold reserves as collateral against new loans.
Just this week, Germany's federal court told the Bundesbank to prove that the country's massive gold reserve actually exists.
This isn't as random as it seems; more than half of Germany's gold reserves are held at the New York Fed, and hasn't been inspected by the Germans for decades. This dates back to the '50s and '60s, when foreign governments could still exchange dollars for gold, and often parked their gold reserves in New York.
So over the next three years, 150 tons of German gold will be shipped back to Germany for inspection.
And yet. As John Carney notes at CNBC:
In reality, it does not matter one bit whether the Federal Reserve Bank of New York actually has the German central bank's gold or whether the gold is pure. As long as the Fed says it is there, it is as good as there for all practical purposes to which it might be put. It can be sold, leased out, used as collateral, employed to extinguish liabilities and counted as bank capital just the same whether it exists or not.
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