Unhappy anniversary. Ten years ago the Chancellor of the day was congratulating himself audibly on a job well done, and in the vaults of the Bank of England grumpy porters were sticking labels on the ingots to indicate a change of ownership.
This was Gordon Brown’s great clearance sale. He had chosen to auction more than half the nation’s gold reserves — a matter of 395 metric tonnes out of a holding of 715 tonnes — and to take payment in paper money, at the lowest price available for two decades. The gold was sold for $3.5 billion in 17 auctions between July 1999 and March 2002 at an average price of $275 an ounce. As we went to press it was worth around $1,125 an ounce. Sellers sometimes can’t be choosers, but this was no fire sale. It was an unforced error, billed as a masterly initiative.
Everybody knew that gold was out of date, and Modern Portfolio Theory had now proved it. The Treasury had worked out that the least risky policy would be to hold less than one fifth of our reserves in gold, or none at all. Oh yes? The years that followed brought investors more than their fair share of risks, but gold was all it should be. Since the sale the price has quadrupled, and has earned the seller a footnote of his own in my Bad Investment Guide. The cost of his misjudgment fluctuates but must now be well above $11 billion. We could use the money, and so could his successor at the Treasury.
His mistake was to believe that he knew better, a common flaw in finance ministers and central bankers. Gold is the only monetary asset whose value does not depend on their signatures in the bottom right-hand corner. This makes it their competitor. They resent it, and have spent much of the last half-century trying to bomb it into submission. All of them have now cut their links to gold. The dollar’s went in 1970, the Swiss franc’s in 1999, and we live in a world of fiat currencies and paper promises. The issuers of sterling promise that it will lose 2 per cent of its value every year, with the loss compounding annually. This they describe as their inflation target.
In this new world, the supply of money is unlimited, but the supply of gold is finite. There is only so much of it on the earth’s surface and it is getting more expensive to dig up. So Ben Bernanke cannot run gold off on the Federal Reserve’s printing presses and distribute it from helicopters. Mervyn King at the Bank cannot create gold and quantitatively ease it out. No wonder it has a rarity value. James Grant, the golden eagle of Wall Street, says that gold is providing collateral for an ever-expanding paper chain.
On the wrong end of the chain are the biggest losers. China now owns an unrivalled collection of depreciating dollars, but only 2 per cent of its reserves are held in gold. India, the other day, made the price jump by announcing that its gold reserves would need to be topped up. Ordinary Indians got there before their government and wear their own reserves in bangles round their wrists. That jump in the gold price left them, in total, very significantly better off. We should all be so lucky with our investments.
More of us seem to be trying. Gold dealers advertise on daytime television, competing with the professional ambulance-chasers and coaxing us to turn our unwanted ornaments into ready money. This may not be a good sign. We last saw a popular gold frenzy thirty years ago, when the crowds flocked into Hatton Garden and the price at once turned turtle. Robert Guy, when he was chairman of the London gold market, would say that it was sometimes exciting and, for long periods, rather dull. James Grant now thinks that if this is not the beginning of the end of gold’s great surge, it is certainly the end of the beginning.
This would not disturb the true believers. Gold, to their minds, is not for trading but for owning. They take their cue from the Boston dowagers who, when asked where they bought their hats, replied: ‘We don’t. We have our hats.’ They have their gold, preferably in the safe or buried in the kitchen garden, kept in hand for a variety of rainy days. This is their strategic reserve, and they would be happier if their rulers saw the need for one.
Those rulers, though, have other ideas and other interests. The great liberal economist Friedrich Hayek argued that competition was needed to keep money honest. It was a mistake, he said, to give the organs of state a monopoly in the production of money. Gold, as their competitor, is in this sense the citizens’ ally against the monopolies — one of them now spread across the continent of Europe. In a monopoly, the consumers are the victims.
The last ruler to understand that gold might be preferred to any paper promises was Charles de Gaulle. He was confronted with a world which was, in all but name, on a dollar standard. The dollar was in theory tied to gold, but in practice, he complained, the Americans were running off more dollars to finance an expensive war. This was in Vietnam. How the cycle comes around.
De Gaulle thought it right to call a halt to this. The time had come, he proclaimed, to establish the world’s monetary system on a common standard, and this could only be gold — ‘gold, whose nature does not alter, which has no nationality, and which has eternally and universally been regarded as the unalterable currency par excellence.’
Suiting his country’s actions to his words, he pulled the Banque de France out of the gold pool, operated from London but dominated from Washington, established by the central bankers in support of their monopolies. Instead he began to present France’s dollar reserves for payment in gold at Fort Knox while the price was still set at $35 an ounce. Four years later the selling window slammed shut, and since then the price has multiplied thirty times over. Gordon Brown, of course, had to know better.
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