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Iran Embraces Gold as Real Money

Iran Embraces Gold as Real Money

Author: Eric McWhinnie
Posted: March 1, 2012

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.”

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.

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