Memo to Ron Paul: gold is a fiat currency (GLD, SLV)

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Congressman and presidential candiate Dr. Ron Paul has spent most of his career advocating a return to the gold standard ( GLD , quote ).  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 ( SLV , quote ) is used in industry, well over 90% of gold is only for investment purposes.   In that regard, it is no better than paper money.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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