Regarding Italy's Proposed Parallel Currency: What If It Was Backed By Gold?

A Five Star/Lega deal is taking shape in Italy. The platform includes a parallel currency. Why not back it with gold?

As noted earlier today, a Five Star / Lega Coalition is in the works in Italy.

The parties are eurosceptic to varying degrees. Part of their platform includes a Parallel Currency.

Heck, why not back it with gold?

After all, the bank of Italy has the third largest gold reserves in the world after the US and Germany.

Banca d’Italia’s Mammoth Gold Reserves

The BullionStar discusses Banca d’Italia’s Mammoth Gold Reserves.

Italy’s gold has had an eventful history. Robbed by the Nazis and taken to Berlin. Loaded on to gold trains and sent to Switzerland. Flown from London to Milan and Rome. Used as super-sized collateral for gold backed loans from West Germany while sitting quietly in a vault in New York. Leveraged as a springboard to prepare for Euro membership entry. Inspired Italian senators to visit the Palazzo Koch in Rome. Half of it is now in permanent residency in downtown Manhattan, or is it? Even Mario Draghi, European Central Bank (ECB) president, has a view on Italy’s gold. The below commentary tries to make sense of it all by bringing together pieces of the Italian gold jigsaw that I have collected.

According to officially reported gold holdings, and excluding the gold holdings of the International Monetary Fund (IMF), Italy’s central bank, the Banca d’Italia, which holds Italy’s gold reserves, is ranked as the world’s third largest official holder of gold after the US and Germany, with total gold holdings of 2,451.8 tonnes, worth more than US$ 105 billion at current market prices. Notable, Italy’s gold is owned by the Banca d’Italia, and not owned by the Italian State. This contrasts to most European nations where the gold reserves are owned by the state and are merely held and managed by that country’s respective central bank under an official mandate.

Palazzo Koch

In its Palazza Koch vaults in Rome, the Banca d’Italia claims to store 1199.4 tonnes of gold. Of this total, 1195.3 tonnes are in the form of gold bars (represented by 95,493 bars), and 4.1 tonnes are in the form of gold coins (represented by 871,713 coins). While most of the bars in Rome are prism-shaped (trapezoidal), there are also brick-shaped bars with rounded corners (made by the US Mint’s New York Assay Office) and also ‘panetto’ (loaf-shaped) ‘English’ bars. The average weight of the bars in Palazzo Koch is 12.5 kg (400 oz), with bar weights ranging from relatively small 4.2 kgs up to some very large 19.7 kgs bars. The average fineness / gold purity of the Rome stored bars is 996.2 fine, with some of the holdings being 999.99 fine bars.

The Banca d’Italia also states that 141 tonnes of gold that it transferred to the ECB in 1999 as a requirement for membership of the Euro is also stored in Palazzo Koch. This would put the total gold holdings in the Palazzo Koch vaults at 1340 tonnes. Gold transferred to the ECB by its Euro member central banks is managed by the ECB on a decentralised basis, and is held by the ECB in whatever location it was stored in when the initial transfers occurred, subject to various location swaps which may have taken place since 1999.

Where's the Rest?

Bullion Star writer Ronan Manly asked the Bank of Italy, Mario Draghi, and other officials a bunch of question on location, leasing, etc. The questions were all refused.

Manly also uncovered a bit of history, translating a video in Italian into English, noting that when the bars were moved to Germany they were stamped with a Swastika:

"The RAI broadcast video shows a 1940 Nazi bar from Berlin, stamped with the eagle and swastika insignia and with Prussian mint markings. The Nazi bar holdings can be explained by the fact that the Italian gold was confiscated by the Nazis during World War 2 and ended up being moved out of Rome up to the north of Italy and then most of it was transported onwards to Berlin in Germany or else to Switzerland."

The reporter, Angela, states that in addition to Rome, the Italian gold is stored at the Federal Reserve Bank in New York, the Bank of England in London, and at the Bank of International Settlements (BIS) in Switzerland. The reporter uses the exact words “Banca dei Regolamenti Nazionali”.

Even in Italian, the video is fascinating. Here are some image clips.​

Italy's National Debt

Italy's National Debt Clock stands at 2.331 Trillion as of May 11, 2018.

Italy's gold is worth a bit over $100 billion. Thus, Italy could not wipe out its debt with gold, nor could the US or any other country.

That aside, backing a new currency with gold, gets my endorsement. How might that work?

Addendum

Clueless MMTers Point Out Lega Rejected the Idea

For further discussion of the absurdities of MMT, please see Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?”

Ultimately, MMT is a belief in something for nothing, that governments can print money at will with no consequences.

Mike "Mish" Shedlock

Comments (25)
No. 1-25
Mike Mish Shedlock
Mike Mish Shedlock

Editor

Excellent question by
caradoc-again led to this post. Thanks.

Wagner-
Wagner-

Any "gold bug" who owns this gold backed currency would immediately redeem it for physical gold (assuming that is possible). Because it would be kinda foolish to think that in future one unit of this currency would buy more gold than today.

And then any "rational person" who redeemed this currency into gold would immediately sell the gold and invest in growth based assets (or bonds, depending on risk tolerance) to take advantage of exponential dividend (or interest) compunding and to avoid gold maintenance fees.

And then we are back in square #1 (i.e. today), where free forex markets determine currency value. Free currency markets were invented for the reason.

Wagner-
Wagner-

I read it. While you did not explicitly point out which piece of that article should have caught my attention, I think it is this one:

Stellar Solution: Do not stamp coins or the paper with a value other than ounces.

However, I really don't see how that "stellar solution" changes anything.

I would bet my pants that the risks with this "stellar solution" are essentially the same - If I wanted to redeem a paper note that states "it equivalent to 1 ounce of gold", then likelihood that central bank/government will brutally screw me and give me only 0.99 ounces is way higher than they will give me 1.01 ounces.

Explain me if I am missing something.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

We admittedly do have an assumption that governments will not cheat. But that is the same as it has always been.