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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