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Saturday 26 May 2012

Britain misses out on the gold rush

Tuesday, 20th September 2011, 12:20pm

Gordon Brown notoriously sold British gold for $275 an ounce, costing Britain several billion. But has our subsequent decision not to buy gold also cost us dear? The Tory press office has had fun with gold’s rise, tweeting that it means Brown’s disastrous foray into asset management cost £12 billion. But as John Rentoul asked, a more serious question is now emerging. How much has the current government ‘cost’ Britain by failing to buy gold?

Yesterday it was revealed that European central banks have turned net buyers of gold for the first time in more than 20 years. Good for them, as the yellow metal hit a record $1,920 per ounce this month. Indeed, for many central banks across the world, it’s been gold a-go-go for some time. But strikingly, Britain hasn’t been part of this rush.

European central banks have added about 0.8 tonnes of gold to their reserves so far this year, says the FT’s Jack Farchy, citing figures from the ECB and IMF. That’s an almost negligible amount compared with global gold consumption, but what’s significant is the turnaround – European central banks have not been net buyers since 1985. It’s part of a wider pattern: central banks, such as those in Mexico, Russia, South Korea and Thailand, have been loading up faster than you can say ‘bullion’. Central bank gold buying is expected to jump more than fourfold this year.

The UK’s gold reserves, however, have hardly budged since Brown infamously sold those 395 tonnes between 1999 and 2002 when prices were at 20-year lows. (People in the industry still speak of a ‘Brown bottom’.) Coffee House checked the Bank of England reserves data, and it shows Britain’s holdings at 9.98 million troy ounces, or 310 tonnes, as of August – around the level at which Brown left it. The UK currently occupies a lacklustre 17th place on the league of largest official gold holders, behind Venezuela, Portugal, Saudi Arabia and the Netherlands, according to the World Gold Council.

So not only has Britain lost out on selling gold at the wrong time, the signs are it’s missing the boat on buying as well. Of course, there’s always the chance that UK officials went on a gold shopping spree since the start of September, but this is highly doubtful. The UK government’s store of gold has remained at exactly 9.98 million ounces since mid-2007 till this August. (One could, of course, argue that at least it wasn’t net selling, as European central banks were until recently.) Over this period, the price has soared from $700 to $1800.

There’s also the view that gold is in a huge asset bubble right now, being purchased by money borrowed at almost no cost from the bond bubble (a much under-reported phenomenon which Allister Heath looks at in this week’s cover story). Perhaps gold will crash, and George Osborne will take a bow. But just last week, many research houses reinstated their positive view on gold, and precious-metals consultancy GFMS predicted the price would hit $2,000 before year-end. JP Morgan recently predicted $2,500. Moreover, hardly anyone is expecting the market to sag back below Brown’s 20-year bottom.

For what it’s worth (or rather, not worth), if Brown had not sold the 395 tonnes of gold at an average price of $276.6 an ounce, the market value of Britain’s reserves would be fatter by about £10 billion today. Then there’s the opportunity cost of Labour not replenishing its stock as gold staged its impressive rally over the past seven years. (As a comparison, China almost doubled its gold holdings between 2003 and 2008.)

And while we’re on this pedantic and pessimistic train of thought, the UK would have benefitted from gold’s 50 per cent price rise of the last 16 months, if Osborne had bought since he came into office – which he didn’t. You can argue that it’s futile to make these points, but George Osborne did not hold back from doing so in opposition. It would not be surprising if, given what the rest of Europe has been up to, he is facing a few awkward questions.

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toco

September 20th, 2011 12:59pm Report this comment

What an incredibly naive and indeed ignorant piece.Tan appears to be suggesting we gamble the nation's financial resources on the commodity markets.Just imagine if Osborne followed Brown's disastrous path and lost billions gambling on the price of gold.Fraser this piece really does bring The Spectator down to a level we should not accept.

Clear Memories

September 20th, 2011 1:08pm Report this comment

Just when is this useless government going to grasp the nettle and put Brown in the dock for wilful incompetence?

Forced to address his failures under oath would see Labour finished as credible political party once and for all. Never again should this nation be faced with a bunch of malevolent class-warriors and spite-mongers having their hands on the levers of power.

Simon Stephenson.

September 20th, 2011 1:12pm Report this comment

You've entirely missed the point Rentoul makes in his 18.08.11 article (and which I've made several times on these pages). Brown is no more to blame for having failed to anticipate a rise in gold prices than is Osborne. At the time of Brown's sale the price reflected the received market wisdom of what the price should be - just as it has done throughout Osborne's period as Chancellor. It's not within the remit of the Chancellor to bet that the market's got it wrong.

It is, however, justifiable to criticise Brown for the process he put in place to sell the gold. By announcing a series of auctions, he guaranteed that we'd get the lowest price possible - this was made clear to him, but of course, in typical fashion, he decided that the opinions of experts counted for nothing, because, as in everything else, he knew best.

John

September 20th, 2011 1:13pm Report this comment

I think this article misses the point of the gold reserves, the UK gold reserves are a store of non-sterling assets to be used in an emergency currency crisis not as an investment to bring income to the treasury. Gordon Brown sold gold but with that money he diversified the non-sterling assets in this emergency fund into foreign currency and foreign government debt that could more easily be sold in bulk in crisis.

Richard Blogger

September 20th, 2011 2:40pm Report this comment

Simple statement: 3G auctions. Anything that Brown may have lost he amply made up on the 3G auctions.

BTW when did the Chancellor become a gold speculator? I thought that was the job of people in the City?

Give it a rest will you?

Fraser Nelson

September 20th, 2011 2:40pm Report this comment

toco, I disagree. Clarissa is not blaming Osborne, she's just pointing out that asset management works both ways. Those who blame Brown for selling might as well blame Osborne for not buying - as Simon Stephenson says, the two acts are equivalents. Selling low is as bad as failing to buy cheap.

Clarissa's blog highlights something I had not considered before: that Brown's gold sale debacle might have paralysed the Treasury, making officials terrified of the 'wrong call'. To the extent that HMT no longer carries out normal asset management exercises. This blog shows UK gold holdings have not altered: which is unusual, when compared to other nations.

If we do have post-Brown syndrome. then it's a point worth making. And worth bringing to the attention of CoffeeHousers.

toco

September 20th, 2011 3:07pm Report this comment

Fraser my point is should Osborne have gambled on buying gold and lost billions one can just imagine the catcalls.Commodity trading should not play a major role in managing a country's finances.

Nick B

September 20th, 2011 3:23pm Report this comment

When Gold bugs ask each other "when shall we sell our gold?" The answer always comes back: "When the bank of England starts to buy"

Rob C

September 20th, 2011 3:27pm Report this comment

The big difference between Brown and Osborne is timing - Brown sold to spend the proceeds whereas now we can't afford a pot... Osborne has no budgetary room to buy gold and if he did so short-term it would be gambling with money needed to pay the deficit. A bit like a homeowner with 5 years mortgage arrears taking his salary to the casino!

Tiberius

September 20th, 2011 5:02pm Report this comment

I agree with toco that it is silly to suggest that the current government has missed out by not repurchasing gold.

It is as fatuous as saying (or not saying) that Darling is guilty for not repurchasing once the Lunatic had moved next door.

Dimoto

September 20th, 2011 9:11pm Report this comment

It is only worth holding gold, if you sell it near the top of the price spike (like now, for example).

If you are a central bank, get rid quick, before some other bank decides to sell and sends the price into free fall.
Osborne could do a lot worse than selling the remaining gold now.

When the world economy settles down, gold prices will collapse, making monkeys of the gold delusionals.

lids

September 20th, 2011 10:56pm Report this comment

You are mistaken if you think gold is in a bubble just now. Give it a couple of years and when we are between $5000 and $12000 an ounce we can talk about a bubble.

Ultron

September 21st, 2011 7:21pm Report this comment

Gold has peaked. It could be a temporary peak or it could start a slide such as we saw in the financial crisis of 2008. My bet is that we are on the verge of another crisis and gold is going to decline (along with every other asset, but perhaps not as precipitously as the others).

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