Ron Paul Attacks Bernanke on Gold

NEW YORK (TheStreet ) -- Congressman Ron Paul's commitment to the gold standard was on display today as he challenged Federal Reserve Chairman Ben Bernanke on whether the precious metal is considered a form of currency.

During his testimony to the House Financial Services Committee, Bernanke was hardly allowed to speak as Paul grilled the head of the Fed.

Paul: The price of gold today is $1,580 the dollar during these last few years the dollar was devalued almost 50%. When you wake up in the morning, do you care about the price of gold?

Bernanke: Well, I pay attention to the price of gold but I think it reflects a lot of things. It reflects global uncertainties. The reason people hold gold is its protection against what we call tail risk ... they have gold as a protection.

Paul: Do you think gold is money?

Bernanke: [Long pause] No.

Bernanke went on to acknowledge that gold is an asset and that central banks hold it as reserves. Paul demanded to know why the Fed didn't hold diamonds as an asset instead of gold if it wasn't really money and Bernanke, who seemed stumped, said it was a "long term tradition."

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Paul has denounced the Federal Reserve for his entire 35 year tenure in Congress and has been the gold standard's biggest advocate, something he danced around with Bernanke. Getting the Fed chairman to admit that gold was a form of money would underscore Paul's belief that gold is a more valuable form of money than paper currencies. Since the Fed started pumping money into the system in November of 2008, gold prices have climbed 113% while the U.S. dollar index has sunk 13%. Gold hit an intra-day record Wednesday of $1,588.90 an ounce.

Many experts think that high gold prices are actually a reflection on the lack of faith in the U.S. dollar. With real interest rates negative -- interest rate minus the inflation rate -- gold has made an attractive alternative to paper money. The real interest in the U.S., at the top end, is negative 1.05% which means that each dollar is worth around 90 cents whereas each ounce of gold is worth more than $1,580.

In a recent interview with TheStreet, Paul said, "At one time the ratio of dollars to gold was $20 to 1 ounce, now it's over $1,500. They'll lose control, people will panic out of the dollar, then you'll see gold at maybe $5,000 to $10,000 ... But now we're losing the trust and we're only waiting on that day, so when that happens there will be a restoration of sound money to some degree."

Paul thinks that Washington will come to its senses before gold hits $10,000 an ounce and crack its fiscal whip, "we're going to quit spending, quit printing money and then restore confidence, but it's up for grabs because the bubble is bigger than ever before."

Paul advocates returning to the Constitutional mandate of using gold and silver as legal tender and then letting the people chose which they would rather trade in gold or paper. "I want to legalize the trading in gold and silver, no taxes, no sales taxes, no capital gains taxes. " Paul hopes if given this option that individuals would opt for gold and silver, making the U.S. dollar more obsolete.

"Gold, if you pick up a coin minted 6,000 years ago, you'd still have your money. If you pick up a piece of paper printed a year ago, it might be worth half its value. So history is on my side of the argument," says Paul.

If a true gold standard were to go into effect, meaning that every dollar was replaced with gold, then the gold price would have to skyrocket to $5,000 or the government would have to extract $9 trillion out of the system. Paul concedes that might happen but that it would be worth the pain.

Jon Nadler, senior analyst at Kitco.com says that Bernanke will be crucified by Paul and his followers for not saying gold is money but that Bernanke was not wrong. "We all know the date and the time when gold stopped being money. This is all about perception, sentimentalism, and reality being at odds with each other ... Anyone who acknowledges that inescapable reality will promptly be dismissed by the gold bugs as a heretic."

With Paul announcing that he will no longer seek re-election to Congress but is instead putting all his eggs in the Presidential basket, he is no doubt hoping other people see his side of the gold coin.

--Written by Alix Steel in New York.

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