"That carpet is gold dust!"

From The Daily Mail:

A worn-out carpet in a jewellery shop workshop is worth thousands of pounds - because it is covered in specks of gold dust and platinum cuttings. The family-run shop is replacing the 15-year-old carpet, which was fitted near seven workstations where craftsmen make jewellery using the precious metals.

Now Richard Blampied, who runs Aurum Jewellers in St Helier, Jersey, with his daughter Julie, is sending the carpet to a bullion merchants where it will be burned. The leftover gold, platinum and silver will then be weighed and its monetary value returned to the business.

Reminds me of when I was a lad at printing college, we did some gold blocking, which involved putting some 'gold' backed foil on the book and printing through it.

The teacher told us that where he had started as an apprentice, they sometimes printed with 'gold' ink that actually contained a fair amount of real gold. Some clumsy clogs had knock the tin of ink onto the floor, and the stuff was so expensive, it made sense to tear up all the floorboards and sent them to the bullion merchants to recover the gold.

I could never decide whether the story was true or not, or whether it was just an apocryphal tale invented by the teacher (or by people at the place he was an apprentice) to serve as a warning, but in the light of this, I'm shifting that one into the "probably true" category.

Fun Online Polls: How much money is there & Republican candidates.

Your answers to last week's Fun Online Poll were as follows:

Taking assets and liabilities into account, how much 'money' is there in the world?

None - 81%
Billions and trillions - 11%
Other, please specify - 8%

Thanks to everybody who took part, I'm delighted to see that the penny has dropped [sic] with 81% of you. While there are indeed billions and trillions in financial assets (be that notes and coins, bank deposits, corporate or government bonds) by definition, there is always an equal and opposite amount of financial liabilities (either the government, companies or the banks owe other people the same amount). Remember: if you have a stash of bank notes under the mattress, you are making an interest-free loan to the government!

Responding to ChefDave in the comments under the poll: Yes, in the very short term, there can be a mismatch between the amounts recorded as assets and as liabilities for book keeping purposes.

Let's say somebody takes out a mortgage of £100,000 to buy a house for £100,000. The house is a real asset and the mortgage is a financial liability of £100,000 to the borrower and is recorded as a financial asset in the bank's books, so on Day One, the net financial asset/liability is £nil. Now, maybe the borrower loses his job and the house falls in value to £80,000, but the bank still records the asset at £100,000. Oops, mismtach!

But that's only in the short term. Sooner or later the bank will repo' the house and sell it for £80,000 and will have to write off the rest (which is a release from a liability from the ex-borrower's point of view i.e. a windfall gain). The bank's owners (shareholders) then have to share that loss of £20,000 between themselves, so the value of their shares falls by £20,000 and the balance is reinstated.

And so on. Saying that "the economy is drowning in debt" betrays the same misunderstanding. All this really means is that some creditors will not be repaid in full; or that actually enforcing all the debts would cause more harm than writing off some of them.

Physical gold of course is not money, it is in itself a valuable asset which can be used as a medium of exchange or a way of measuring liabilities - i.e. if I borrow ten gold coins from you, then this a financial liability and your receivable is a financial asset. This still nets off to nil gold coins and does not change the number of gold coins in existence. And the fact that a country's currency is expressed in terms of gold ('Gold standard') does not stop it being a fiat currency. The government can change the exchange rate whenever it wants, this is just a question of making a foul compromise between political and economic forces.
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Ross has posted an Arbitrary list of the best to worst Republican candidates for President. Staying in the spirit of things, that's this weeks Fun Online Poll: "Whom would you like to see as the Republican candidate for President?"

Vote here or use the widget in the side bar.

Gordon Brown's gold-owning democracy

I've been emailed a link to this article, which reminds us that Brown decided to sell the bulk of the Bank of England's gold a while back, netting about £2.3 billion, and that had it been sold at today's prices, this would have netted about five times as much, so in theory, the taxpayer has made a 'loss' of £10 billion, or at least not made that amount of profit (which would by and large be just on paper if we just left it in the vaults).

Fair enough, Brown handled the sale badly by announcing it in advance, thus depressing the market price slightly, but I do wonder how many of those people who are whining now made the decision at the time to buy gold? And what is £10 billion in today's money? It's about five days' worth of public spending/waste, big deal.

Let's contrast that with the loss suffered by the taxpayer as a result of the council house sell-offs, which were deliberately and calculatingly far below market value. In round terms, let's call it two million units and a loss of £70,000 on each, that's a loss of £140 billion, so which you can add about £60 billion extra Housing Benefit paid to the owners of those units where the original purchaser had moved out, so the loss to the taxpayer is around £200 billion (big margin of error) i.e. twenty times as much as the notional loss on the gold sales, that's nearly three months' worth of public spending

Hmmm.

What this boils down to is that Brown made a huge mistake by presenting this as an economic decision, by which he sold the stuff at or close to market prices to private investors, rather than a political decision to create a "gold-owning democracy". Had he done a Thatcher and sold it at undervalue to a defined class of deserving UK investors, would people still be complaining like this? I know that I would - the fact I could kick myself for not having bought gold ten years ago (to match HM Treasury's sale thereof) is an entirely separate issue, but that was my decision.

The Joys Of Supply And Demand

From Commodity Online:

Global gold production is projected to exceed 2.6 thousand metric tons by next year, according to GIA.

In its global report on gold mining stocks, Global Industry Analysts Inc said production is being primarily driven by increasing gold prices, which are improving the economic viability of hitherto unviable resources*, and technologies...

Gold supply is a mix of mined gold, central bank supply, and scrap recovery. About two-thirds of global gold supply is met from mined gold. In 2009, mine production broke away from a trend of decreasing production that began in 2006.

For comparison, the total amount of physical gold held above ground is estimated to be about 80,000 tons (that's what they said on that Dispatches programme on Channel 4 yesterday, other sources say it's a bit more than that), so annual new production of 2,600 tonnes is pretty heroic (it's enough to increase physical supply by over 3% a year - if only the housing market were as responsive!).

Just for fun, let's divide 80,000 tons by world population of 6.8 billion, that's enough for about 12 grams each, i.e. about £400's worth at today's prices. That would do for coinage, jewellery, but not much more than that. We can't all magically stick our life savings into gold.

* Resources = stuff that is physically there, whether it's economically viable profitable to mine it or not. Reserves = resources which are worth mining. So the amount of reserves can go up and down rapidly; the amount of resources is fixed.