The Barbarous Relic Rises Again

There’s gold in them thar’ shops: the rush is on

Tucked away beside the ornate entrance of the Savoy hotel in London are the discreet premises of ATS Bullion. Over the last few days staff there have witnessed an unprecedented phenomenon: queues.

The US Mint, responsible for ensuring an adequate supply of American coinage since 1792, has been forced to halt sales of its American Buffalo solid 24 carat gold coin because it was running out of supplies. It is also limiting the availability of its 22 carat American Eagle alternative. [I don’t believe this is a fact. The US makes money on sale of these coins and will mint however many the public wants. Any lack of them is just temporary. But I do believe that demand for gold bullion has gone way up.]

Demand for gold coin is undoubtedly higher outside the US than inside. The reason is that in panics, foreign investors tend to buy US dollars. This raises the value of the dollar, which drops the price of gold, as priced in US dollars. The effect is that the US consumer does not see a big drop in the value of the dollar. Hence they have no reason to hedge with gold. (This will change if the Fed gives up and begins using inflation to save the banking system.) Foreigners, on the other hand, see the price of gold going up, and worry about the financial headlines about the US. So they move into gold.

Of course we all know that gold is no longer money. It’s a barbaric relic of bygone days. No one would think to back a modern currency with gold. However, in these times of banking panics, it’s interesting to note that the single largest collection of gold on the planet is at the New York branch of the US Federal Reserve (5000 tons). Now you tell me. Why would the Federal Reserve have so much metal around? Don’t you think they could find a better use for it than holding down the floor in a building they have to pay to guard?

Wikipedia says that over mankind’s short lease on the planet, 145,000 tonnes of gold have been mined. Of that, 29,800 are held as “gold reserves” by various countries and Federal Reserve equivalents. Most of the rest is held by private parties, or is in your teeth, or some of the things on your shelves. For an interesting story, read the wikipedia article on the Moscow Gold a few hundred tonnes, that was sent to the USSR early in the Spanish Civil War. By the way, my calculator says 29,228 troy ounces per US ton.

Meanwhile, the Europeans are arguing over their solutions to the banking panics there:

[UK] Savers in Stampede to Savety

Alistair Darling intervened twice with the Irish government on behalf of UK banks yesterday amid fears that Dublin’s blanket guarantee for savers was causing an exodus of funds across the Irish Sea.

As the Irish government sought to rush legislation through the Dail to protect its banks, Treasury sources said last night that the Irish finance minister, Brian Lenihan, was told “in no uncertain terms that the scheme was a problem for the UK”.

Dublin was unrepentant about the scheme, which has drawn criticism from elsewhere in Europe, hinting that France might follow suit. Paris denied the suggestion. Instead, President Nicolas Sarkozy is floating the idea of a €300bn lifeboat for European banks, a plan that appears to have little support in Britain and Germany.

Like the UK, Irish banks lent liberally during the housing bubble, and it is thought that the bank that came near to failing had been extending loans worth 110% of property values.

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