Is the gold which forms the UK’s Gold Reserve held at the Bank of England as pure as had previously been believed or has the Bank at some stage been cheated by an unscrupulous supplier selling The Old Lady of Threadneedle Street gold bars which are, shall we say, a few carats short?
This is the question raised in a number of newspaper reports (HERE for example). As usual the information has had to be extracted from a Public Body (one that ultimately serves the People of the United Kingdom), on this occasion the Bank, by means of a request under the Freedom Of Information Act 2000 in like manner to a dentist removing a set of particularly well-entrenched wisdom teeth.

The issue that is raised is that of the purity of some of the gold bullion bars held by the Bank, some of which may have been there for decades. Cracks have appeared in some bars which suggests to experts and even to the layman that those bars are not as pure as they should be. Today bullion which is intended for use by Central Banks are described as ‘London Good Delivery’ bars and weigh in at 400 ounces (12.5 kg) and should normally have a minimum purity of 99.5% or 995 fine (i.e. 995 parts of gold per thousand).

The fact that some bars may contain something in sufficient quantity to affect their appearance suggests that the level of purity is significantly lower than it ought to be and if so, someone has, perhaps in the dim and distant past, pulled a fast one on the Bank. Or, to put it another way, the Bank has been well and truly had.

The Bank, of course, seems unmoved by the possibility:

A Bank spokesman insisted it was not a big problem. The gold could easily be sent off to a refiner to be melted down and turned into new bars, he said.

No doubt that is entirely right, strictly speaking. But does it not also sound utterly complacent? What, you might ask, will be the value of the ‘new’ bars if it turns out that some crafty so-and-so once sold the Bank gold that was sufficiently impure to affect its physical appearance, say by a factor of 5%? That would mean the gold was only 945.25 fine and so, new bars at the requisite level of purity would necessarily be 5% short of what we thought we had in terms of the quality of ‘London Good Delivery’.

Current Bank of England figures show that in August 2007 we had 9.98 million fine ounces of gold, worth today US $ 7,358,753,000. If, however, purity was to be found to be 5% off, that would only be worth US $ 6,990,815,350 meaning that, at worst, we have US $ 367,937,650 (£180 million) less than we thought. Ouch!

I say “at worst”: of course, it may well be that things are not as bad as that but then they may equally be worse. But it does beggar belief that, over all these years, the Bank of England may have apparently never bothered to check that the gold they were purchasing was of the quality they thought they were buying, something which would be a matter of the greatest simplicity to check.

But my lawyer’s nose sniffs another scandal in the wings.

Since 1999 Gordon Brown, in an act of rank incompetence, has flogged off 12.3 million fine ounces of gold reserves (just over half of what was held in 1999). He has already been rightly castigated for having done so as the gold price in 1999 was US $ 278.76 per fine ounce whereas it is now US $ 737.75 per fine ounce, 2.65 times the 1999 price, so we have notionally, because of his foolishness and imprudence lost US $ 5,645,577,000 (£2,759,256,616). Ouch again! That is a lot of hospitals and nurses, as they say.

It is this 12.3 million fine ounces which attracts my attention, legally speaking.

It has been sold, presumably as being of ‘London Good Delivery’ quality, that is of 995 fine quality. If it transpires that any of the gold sold was, say, of only 945.25 fine quality (that is 5% less), the purchasers would, prima facie, be entitled to sue the Bank of England for not just the 5% difference from that contracted for but also for the consequential loss:

1) 5% of 12.3 million fine ounces, being 615000 fine ounces, at US $ 278.75 (the shortfall in gold quantity), which is US $ 171,437,400 (£83,789,447);
2) 5% of 12.3 million fine ounces, being 615000 fine ounces, at US $ 458.99 (the difference between the price in 1999 and 2007) which is US $ 282,278,850 (£137,962,830)

So as well Gordon Brown (who, as usual, acted against advice) losing us £2.8 billion, the Bank of England, by an act of incompetence which might easily have been avoided, may have laid us open to a liability in damages of £221 million and having gold reserves up to £180 million less than we thought: if, that is, the gold quality is only 5% less than we all thought. It may be worse.

Does any of this surprise us? No.

Will Brown and the Bank try to cover it up? Of course.