Monday, January 21, 2013

All Contend for Gold,

and all depend on gold (Nach Golde drängt, am Golde hängt doch alles. Goethe's Faust I, verses 2802-4).


A couple of weeks ago the German Federal Court of Auditors (Bundesrechnungshof) complained about the sloppiness with which the German Federal Bank checks its gold reserves it has bunkered in London, Paris, and (not Rome) New York. And continuing with the Voice*: It would be much nicer if they came home to Frankfort where the Bundesbank actually only keeps 82857 bullion or 31 percent of Germany's reserve. The reason that most of Germany's gold is not in Frankfurt has to do with the Cold War. At the end of the last war Germany had no gold at all but the Bundesbank started to change some of their US dollars, British pounds, and French francs into gold but keeping it in those countries out of fear of a Russian invasion. The foreign storage was also one out of convenience for in times of exchange rate fluctuations of those currencies mentioned above German gold in London, Paris, and New York could be used as a fast buffer for stabilizing the exchange rate of the Deutsche Mark. Since 2001 France and Germany share the euro so the 29775 ingots kept in the Banque de France will be brought home completely. With the British pound still being a global player the amount of gold in the Bank of England remains there. This is in fact nothing compared to the 122597 bullion Germany presently keeps in the vaults of the Federal Reserve Bank of New York 24 m below street level in Lower Manhattan. That 21795 ingots of this gold will be repatriated has spread rumors that Germany does not trust the Fed anymore and even worse as a conspiracy theory stated: What Do German Central Bankers Know That We Don't?
*Remember Frank Sinatra who liked to go traveling to London, Paris and Rome but found it so much nicer to come home?

Well, was it not Republican Ron Paul mistrusting the Fed in the first place asking that holes be drilled in the Fed's ingots to check if they are solid gold? In Germany Rolf Baron von Hohenau articulated the German angst saying: We need to know if it's really gold or is it something covered with gold. Let's face it, it is not easy to fake bullion. The density of pure gold (19.32 g/cm3) is high so diluting it with copper (density 8.96 g/cm3) will not do the trick. You could however use gold-coated tungsten (density 19.25 g/cm3) and possibly get away with it. The problem is that tungsten is a precious metal for industry and rather expensive (45 U$/kg). So why not take depleted uranium (density 18,95 g/cm3) that is in abundance, slightly cheaper (42 U$/kg) and sell the gold-plated ingots as gold. So we transform all the DU that is floating around that nobody wants but everybody wants to get rid of. If you have ever tried to drill a hole in DU you will know that in this case Ron Paul's suggestion will work. However there are more refined methods to check gold ingots.

A German official testing gold ingots with ultrasound
At the end of the transaction just 50% of Germany's gold reserve will be stored in Frankfort sitting there idolized by many, neither growing nor diminishing except for about 5 tons annually that our Finance Minister buys to mint coins for collectors. In transforming gold into coins Mr. Schäuble is double-gaining for not only the seignorage* but the profit of the Bundesbank will flow back into the federal budget too.
*the difference between the price of the metal and the nominal value of the coin. One can overdo it in minting a few grams of platinum into a coin giving it a nominal value of one trillion US dollar.

In the meantime the public full of German angst is demanding: Bring all our ingots home!

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