RON PAUL:  The price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. 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. I think people are -- the reason people hold gold is as a protection against what we call "tail risk" -- really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.

PAUL: Do you think gold is money?

BERNANKE: No. It's not money. 

PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

BERNANKE: Well, you know, it's an asset. I mean, it's the same -- would you say Treasury bills are money? I don't think they're money either, but they're a financial asset.

PAUL: Well, why do -- why do central banks hold it?

BERNANKE: Well, it's a form of reserves.

PAUL: Why don't they hold diamonds?

BERNANKE: Well, it's tradition, long-term tradition.

PAUL: Well, some people still think it's money.

Although commodity standards were last discussed when U.S. inflation was high and variable, Bullard noted that today, inflation is quite low.  He added, “Tying the currency to commodities when commodity prices are highly variable is questionable.” 

While a commodity standard forces accountability on the central bank, “it did not always work because governments sometimes changed the rate between the commodity and the currency,” Bullard said.  “Inflation targeting is another way to force more accountability to the central bank and anchor longer-term expectations.   Make the central bank say what it intends to do,” he said, “and hold the central bank accountable for achieving the goal.” 

“Inflation targeting,” Bullard concluded, “is the appropriate modern alternative to historical commodity standards.”

Well, the signal that gold is sending is in some ways very different from what other asset prices are sending.  For example, the spread between nominal and inflation-indexed bonds, the break-even, remains quite low, suggests that markets expect about 2 percent inflation over the next 10 years.  Other commodity prices have fallen recently, quite severely including oil prices and food prices. So gold is out there doing something different from the rest of the commodity group.

I don't fully understand the movements in the gold price. But I do think that there's a great deal of uncertainty and anxiety in financial markets right now.  And some people believe that holding gold will be a hedge, against the fact that they view many other investments as being risky and hard to predict at this point.

Asked about record gold prices and the decline of the dollar, Plosser said "I think we don't want to entirely dismiss that... I do think from a policy standpoint that we need to be cognizant of what these asset markets are doing and.. better understand how they may or may not be giving us clues about what the future may hold."

Gold is down, and I consider that to be a sign -- just one of a jillion, and I wouldn't overweight it -- that the marketplace considers the Fed serious about inflation -- not just me or somebody else -- but the Committee.

I think that gold has a poor record on the whole in predicting inflation - changes in the rate of inflation. It may well reflect the strong global economy particularly in Asia where incomes are growing handsomely. There's a long history of demand for gold and gold jewelry as a safe - a way of safe guarding assets. That's where it may come from but I'm not an expert on the gold market. I just don't think it has that much bearing on what I do.

Somehow poor and wretched Volcker--never knowing where he stood on any issue--had succeeded in instilling an irrational fear of gold in his tyrannical master {John Connally}, whom he tried constantly to please by catering to his hatred of foreigners (particularly the French) instead of his capacity (not inconsiderable) for straight reasoning.

As cited in Volcker, the Triumph of Persistence by William L. Silber