Mar 26 2012

The Gold Bug

You know my methods Watson.

“But your grandiloquence, and your conduct in swinging the beetle – how excessively odd! I was sure you were mad. And why did you insist upon letting fall the bug, instead of a bullet, from the skull?”

“Why, to be frank, I felt somewhat annoyed by your evident suspicions touching my sanity, and so resolved to punish you quietly, in my own way, by a little bit of sober mystification. For this reason I swung the beetle, and for this reason I let it fall from the tree. An observation of yours about its great weight suggested the latter idea.”

The problem of fake gold bars

Felix Salmon, Reuters

Mar 25, 2012 16:19 EDT

You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

In the case of gold, then, what JK Galbraith famously called “the bezzle” – the amount of wealth that people think they have, which in fact they don’t have – could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

From the comments by Doly

Just to get people who worry about this slightly more worried: gold-plated tungsten will fail the density test, but this is because tungsten is slightly too dense. Making sure you leave some small hole of the right size, or add the right amount of almost any other metal (most metals are less dense), should solve this problem. This is an example of a very shoddy forgery. Somebody who took their forgery as seriously as they should when we’re talking some decent money, should have no trouble at all producing bars of the right weight and density. As Felix points out, conductivity would still show… but frankly, I think any competent chemist should be able to produce a gold-plated bar that passes most tests except cutting it in half.

As always, I only traffic in the most scurrilous rumors.

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