Issue 167: 2018 08 30: All That Glitters

30 August 2018

All That Glitters

Gold, Gottingen and Venezuela.

By Neil Tidmarsh

Two years ago, over a period of two months and ten visits, a 19-year-old boy sold 279 gold bars to a bank in Gottingen, Germany, where he lived.  The bank paid him €300,000 for them.  It was reportedly keen to buy even more of them off him, and had apparently sold some to other banks (presumably at a handsome profit to itself).

But all that glitters is not gold; the bars were made of copper and tungsten, and merely gold-plated.  The teenager had bought them on eBay for €300 each.

The truly amazing thing about this story is that no one ever spotted that the bars were fake.  Anyone could have rumbled the scam by merely scratching the surface and seeing the non-precious metal beneath the gold plate, even without bothering to subject the stuff to ultrasound or electrical conductivity tests.  But no one did.  The boy was only caught out because his bank account, swollen with the proceeds of these transactions, triggered a money-laundering enquiry.  Police raided his house and found a number of ‘gold’ bars there, and that finally set alarm bells ringing.  His trial began last week.

This, of course, begs an intriguing question.  If the boy hadn’t been betrayed by his bank account and had got away with his (alleged) deception, would it have had any consequences at all?  Would it have changed anything?  Crimes are crimes, after all, because they have terrible negative impacts on their victims and on the societies in which they take place.  But would it have made any difference to the bank, to Gottingen, to Germany, to the world in general, whether those 279 gold bars, doing nothing but sitting in a bank vault, segregated from the world and invisible to it, were real or fake?

This isn’t to take an amoral or even an immoral attitude to a serious crime.  Certainly, on the one hand, money is essentially an IOU from the bank or state which issued it; a message from the Bank of England saying “I promise to pay the bearer on demand the sum of…” is printed on every one of its bank notes.  Money will be accepted as sound (i.e. as being worth what the figures on it says it’s worth rather than what it might be worth in itself as mere paper or metal) only if the user has faith in the bank or the state being able to give it ten pounds’ worth (or ten euros’ or ten dollars’ worth) of real wealth in exchange for that scrap of paper or disk of non-precious metal.  And for centuries, everyone has accepted that real wealth is gold (for a number of reasons – gold is relatively scarce, non-tarnishing, beautiful, durable, malleable and relatively portable) but it could just as well be something else – livestock, for instance, or land, or another precious metal, or diamonds.  Or oil.

But – on the other hand – no one ever does actually try to redeem money for real wealth from the Bank of England, or any other bank, do they?

The question might be intriguing, but of course it’s also disingenuous.  Any real economist, such as my colleague Frank O’Nomics, would point out that a bank or financial system or state would collapse if there was any suspicion that it didn’t have sufficient ‘real’ wealth to honour its IOUs, so policing the integrity of its gold reserves or prosperity is of the utmost importance to everybody.

Which brings us to Venezuela.

The currency of Venezuela has become more or less worthless as the country’s economy continues to collapse and faith in the state’s ability to pay its IOUs has vanished.  Disastrous economic policies and the fall in global oil prices have brought Venezuela to its knees: prices are doubling every 25 days; hyperinflation is running at about 100,000%, and the IMF reckons it will reach 1,000,000% by the end of the year.

It’s at the stage where it’s difficult to say exactly what its currency is.  Once upon a time and not so long ago it was the ‘strong’ (an unintentional irony, surely) Bolivar, but when that began to collapse the government launched a crypto-currency called the Petro, intended as a kind of Venezuelan bitcoin and backed up by the country’s oil reserves; it remains somewhat mysterious and “has been dismissed as a scam on crypto-trading platforms” according to The Times.  Last week President Maduro launched a new ‘sovereign’ Bolivar to replace the ‘strong’ Bolivar, simply by knocking five zeros off the value of the moribund currency and printing a new design of banknotes (which no one will use anyway – nobody has been handling actual physical money in Venezuela for some months now).  100,000 ‘strong’ Bolivars in every bank account became 1 ‘sovereign’ Bolivar overnight.  The rebranded currency has already begun to dive – its official value is 60 to $1, but its black market value fell to 75 to $1 within days.

Tomorrow – 1st September – the ‘sovereign’ Bolivar is due to be pegged to the mysterious Petro, which is unlikely to improve its health.  This week, perhaps in recognition that the ruined and decayed infrastructure of the country’s oil industry means that even its unparalleled oil reserves won’t be sufficient to restore faith in the currency, President Maduro attempted to inject some confidence into it by bringing gold into the equation.  The government is now offering its citizens mini gold ingots – 1.5g and 2.5g pieces from Venezuelan mines – to be purchased in the new ‘sovereign’ currency; its own desperate way, perhaps, of promising “to pay the bearer on demand the sum of…”.

Meanwhile, the country continues to suffer shortages of all kinds – food, electricity, medicines – and its people continue to flee in their millions to the neighbouring countries of Brazil, Peru, Colombia and Ecuador.  President Temer of Brazil has just declared that emigration from Venezuela is now “a threat to the harmony of the whole continent”.

All this puts the affair in Gottingen into context and perspective.  But I continue to wonder – would it have made any difference whatsoever if those dummy bars had remained unspotted in their bank vault?  Perhaps more skilled con-men have pulled off the same deception in other banks.  We simply wouldn’t know, would we?  No, scrap that thought – the international financial system is fragile enough at the moment as it is, without irresponsible and ignorant commentators like myself spreading groundless fear and suspicion.



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