The Legend of Gordon Brown's Gold

Between 1999 and 2002, Gordon Brown sold 60% of the UK's gold reserves. I've noticed it has become something of an accepted wisdom held among those on the centre-right of UK politics, that this auction was a clear example of unforgivable incompetence on the part of Brown, and that it possibly even contributed to our country's current financial predicament.

Now, I'm personally no fan of Brown or New Labour, but the logic itself appears seriously flawed to me.

In 2010 the Telegraph argued:

"The price of gold has quadrupled since Gordon Brown sold more than half of Britain’s reserves.

The Treasury pre-announced its plans to sell 395 tons of the 715 tons held by the Bank of England, which caused prices to fall.The bullion was sold in 17 auctions between 1999 and 2002, with dealers paying between $256 and $296 an ounce. Since then, the price has increased rapidly. Yesterday, it stood at $1,100 an ounce.

The taxpayer lost an estimated £7 billion, twice the amount lost when Britain left the Exchange Rate Mechanism in 1992.The proceeds from the sales were invested in dollars, euros and yen. In recent years, most other countries have begun buying gold again in large quantities."

 http://www.telegraph.co.uk/finance/personalfinance/investing/gold/7511589/Explain-why-you-sold-Britains-gold-Gordon-Brown-told.html

So according to the Telegraph's theory, if the gold hadn't been sold between 1999 and 2002, the current Con-Dem coalition government would be able to sell it now, for an increased £7billion more than Brown got for it. That money could be used to ease the UK's current sovereign debt, something which is of major concern to the present government following the global economic crisis of 2008, as they try to maintain interest payments with a relatively low GDP at their disposal.

And given that this hypothetical gold doesn't exist now, solely because of Brown's decision, such a theory is of course useful in the context of the coalition justifying, for example, public sector cuts eg 'we don't wish to cut, but by selling the gold when he did, Gordon left us with no option'.

So why did Brown start selling our gold in 1999?

The price of gold previously spiked in 1981, but had since been in decline. Our gold reserves were losing  value by the year. In 1999, the question would have been 'why on earth didn't we sell them in 1981?' After all, for most of the 20th century, government bonds had out-performed gold. So in 1999, Brown sold the gold for government bonds, diversifying the UK's investment porfolio, meaning all our eggs would no longer be in one proverbial basket. Apart from being more stable in value than gold, these bonds also had the advantage of accruing interest. With the price of gold in decline, it would have seemed like the obvious thing to do.

http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/GoldReserves.PDF

Of course, the precious metals industry were bitterly disappointed with Brown's decision, especially so when in an ill-advised attempt at transparency, Brown publicly announced his intention to sell, which resulted in the price dropping even further. Pierre Lassonde, Chairman of Franco Nevada Mining told the BBC in 2008: 


"Gordon Brown came and said 'Well, yep, I'm going to be selling gold' so the market just caved in and the market went down to $250."

http://www.bbc.co.uk/pressoffice/pressreleases/stories/2008/06_june/13/gold.shtml 

But it's also worth remembering that gold had been trending downwards for almost twenty years prior to Brown's announcement, too.

How did the gold market recover then? Shouldn't Brown have predicted it would?

It's been claimed that the gold market was bound to recover eventually, that 'experts' knew it would. But the fact is that the gold market did not fix itself.

In September 1999, the International Monitary Fund (IMF) met in Washington, and signed the Central Bank Gold Agreement in response to gold sales by Switzerland (around four times the amount Brown had sold), Austria, the Netherlands, and of course the UK. Their issue was that Brown's announcing of his sale in advance had in particular, they believed, unsettled the market. Countries like Belgium and the Netherlands had always been more discrete about their gold sales in the past. The Central Bank Agreement meant that:


"the 11 national central banks of nations then participating in the new European currency, plus those of Sweden, Switzerland and the United Kingdom, agreed that gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tonnes (12.9 million oz) annually over the five years September 1999 to September 2004, being 2,000 tonnes (64.5 million oz) in all."

http://info.goldavenue.com/info_site/in_mark/in_offgold_wa.htm

The immediate effect of this was to re-establish confidence in gold, and its market value rose accordingly. In 2004, an extension was signed, and gold's value has risen ever since, leading to the Telegraph's figure of $1,100 an ounce.

The irony is that it was Gordon Brown's announcement of his gold auction, criticised as a mistake, because it led to a drop... that eventually led the IMF to make their decision... which in turn led to the price rising again for the first time in years.

This is a major hole in the argument to villify Brown for selling in 1999. If he hadn't sold the way he did, the value of gold wouldn't have been set to recover in quite the way it has either. One can't have it both ways!

Did Brown sell the gold so that he could indulge more money in the public sector?

Not at all. In 2000, Brown raised £22.5billion from the sale of the 3G mobile phone spectrum to Vodafone, Orange, BT Cellnet and One2One. That's £22.5billion. Not the Telegraph's hypothetical £7billion, but a real £22.5billion.

http://news.bbc.co.uk/1/hi/business/727831.stm

Brown used this money to address the UK's sovereign debt. He actually did what the Telegraph suggest doing now (hypothetically, of course) with their imaginary gold (IMF limitations on auctioning gold, not withstanding!). He reduced our sovereign debt, which meant that our interest payments became lower. Money saved was then used to bolster the NHS.

So why do politicians and commentators of the centre-right in the UK persist in scapegoating Brown over the gold?

Recently, news articles concerning a rumour that Gordon Brown was applying to be head of the IMF were flying around. Cue unbridled disgust from the centre-right of UK politics, and a torrent of accepted wisdom about how Brown singlehandedly 'wrecked the economy'.

Now, it's probably true he didn't help matters by continuing a policy of deregulating the banking sector. You could argue his lassez-faire approach enabled investment banks in this country to take hugely irresponsible risks, with disastrous consequences.

But it's difficult for those on the centre-right to criticise Brown too harshly in this way because pre-2008, while he was deregulating the banks, the Conservatives were screaming at him for not deregulating far enough.

Of course there are plenty of other reasons I can think of to be annoyed at Brown (and Labour):


1) entering into an illegal war.

2) using Private Finance Initiatives.


3) introducing tuition fees for students.

Off the top of my head. But again, the trouble for the centre-right, is they can't criticise too harshly on these issues, without appearing hypocritical, because:

1) the Conservatives strongly supported the war in Iraq.


2) PFI was their initial idea (admittedly, George Osborne was critical of PFI during his election campaign, but has since extended contracts worth £6.9 billion.)


3) the Con-Dem coalition have subsequently increased the cap on tuition fees in England to £9,000.

And thus, any time Gordon Brown is even mentioned in the press, you can be sure that the legend of the gold he apparently sold for peanuts won't be too far behind.