Ron asks a great question. Why do central banks hold gold? They do not hold silver, copper, oil, or real estate… The only non-financial asset they hold is gold.
Bernanke’s comparison with Treasury bills is interesting. Treasury bills are not money, of course. They are a “financial asset”, because they represent a claim on future money.
But gold does not represent a claim on future dollars. So if gold is not money, and it does not represent a claim on future money, then what is it, exactly? And why do central banks feel the need to hold so much? Tradition?
Maybe it’s for the same reason as everybody else: “As a protection against … really really bad outcomes”, in Bernanke’s words.
The iTulip guy thinks central banks hold gold as part of “Plan Z”. His logic goes something like this. Historically, every currency that ever played a major role in international commerce was backed by gold. That changed in 1971, meaning we are just 40 years into a massive experiment. What if that experiment turns out to be a failure? What if people wake up one day and realize they are being paid in paper, and all you can really do with that paper is exchange it for more paper? What if everyone starts delving into questions about who creates that paper, and when, and why? Well, we might find ourselves facing a “really really bad outcome” remarkably quickly, and the Fed’s gold reserves would be all that stood between the dollar and absolute zero.
That is the iTulip guy’s explanation, anyway. Me, I have no idea. If you have one, I would love to hear it.
(P.S. If you ever construe anything I write as investment advice, you are a moron. Feeling the need to reiterate that.)