Brown’s Gold

In 1999 Brown as Chancellor of the Exchequer sold 400 tons of gold at the bottom of a 20 year slump in the gold market. He sold at $275 an ounce and could get closer to $700 now.

Conservative Home’s Left Watch argue that, by being patient and waiting for the price of gold to more or less triple, the French have made 50% more than Gordon Brown on gold sales having only to sell half as much.

Tim Montgomerie asks “Is there a more powerful example of Brown’s incompetence?”

When it comes to the matter of how the Gold was sold I think that is fair comment, it really does seem that Brown didn’t know how to best sell gold – and more damningly – didn’t try to find out the best way either.

By announcing the sale in advance it is reckoned that he depressed the market by around 10%. Record numbers of investors took up “short” positions on Gold in anticipation of the sale.

By way of illustration, whereas he sold gold through auctions Australia and Switzerland sold through the normal and more profitable channels and then announced the sales after they had taken place.

But the decision to sell the gold in 1999 seems far more difficult to judge than is often presented.

When it comes to partisan point scoring it seems Tim leaves his pro-market credentials at the door. Even Guido Fawkes cannot help himself lamenting the “billions lost” by Brown.

There are a number of caveats on Brown’ bungling so rarely mentioned some would think that they didn’t exist. Robert Peston points out that we didn’t just ditch gold, we purchased interest-bearing assets instead.

The $3.5bn of revenue raised in the sales was invested in interest-bearing assets denominated in dollars, euros and yen to the extent of 40%, 40% and 20% respectively.

So to calculate the true net loss to the taxpayer, I would have to adjust for the yield on these assets and movements in the value of those currencies. And I don’t have enough information on precisely what was bought and when to make that calculation.

It is probable, however, that the effective net loss on Gordon Brown’s great gold sale would be a bit less than $9bn – but it would still be a very significant loss.

So a poor defence for Brown, but a defence nonetheless. Brown’s logic was that Gold would not recover in value to the extent that it would out earn these assets.

He was wrong, but if Tim Montgomerie and Guido Fawkes knew Gold was to triple in value in a decade why do they not live in houses made out of it?

Its very difficult to beat the market and utterly impossible to assimilate all the information needed to do so on a consistent and intentional basis.

Brown did a marvellous job of making as little money in a weak market as he could, but its a little disingenuous to suggest Brown has lost us billions of pounds.

This behaviour seems to have little to do with an interest in the best practice of Government or deeply held beliefs but a great deal to do with political gesturing.

AMMENDUM: This is quite interesting on Gold as an investment.

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13 thoughts on “Brown’s Gold

  1. Here is a slightly better counter. Or maybe not. You tell me:

    In 1981, Geoffrey Howe could see gold trading at – what – $800 per oz? In terms of inflation-adjusted prices, it was way way higher than it is now. Now, he could have known that he was going to deflate massively, and that consequently gold was not a good asset to own. But he didn’t sell it. Now, how much did that cost?

    Well, if we are simple, and take as starting and ending points the price was the same ($800), then the cost was however much the gold was worth, multiplied by the return that safe assets might have made in the years since.

    In 1980, we had6 600 tonnes of gold.
    http://www.gold.org/assets/file/pub_archive/pdf/Rs23.pdf

    600,000kg = 600m grammes or about 20m oz, so about $16bn worth at 800$. Call it £8bn (was it really that much? Wow)

    If we assume he could have sold half= £4bn, I reckon that the nominal return on £ assets for the rest of the 1980s was 10%, and call it 6% for the 1990s and 5% for the years since . . . then the $8bn would be worth …. £41bn in 2008.

    So, by failing to sell gold when it was really expensive, and keeping it in zero-return form for 30 years, Geoffrey Howe and his successors cost us £37bn of 2008 money. That was what Brown was trying to bring an end to….

    Whose screw up is worse? Is an omission worse than an act?

    Bet you never expected such a long reply

    1. Even if the effect is a ~£40bn black hole sins of omission are always more easily forgiveable, at least in others.

      (Of course, the opposite applies when it is yourself you need to forgive for what you didn’t do).

      It a different situation I’m afraid but it should give every one a large pause for thought.

      Although saying that… Given that gold had at least partly become so popular because inflation had run away in the 1970s and Geoffrey Howe was part of a government determined to stamp it out, it would have made some sense to sell given he knew something (Thatcher’s govt determination/grit/evil etc.) the market didn’t. Perhaps Howe wasn’t that determined inflation would be tamed as it was? Or wasn’t convinced gold prices and inflation were really linked.

      Looking forward to your post, sounds pretty interesting. I’m guessing its going to be some sort of no-score draw between Labour and Tory (maybe a few own goals)

  2. The reason I think selling the gold at all was a bad idea is this: even though the price fluctuates, gold tends to hold its value well. Bonds, foreign currency, etc – the things you might buy with gold – don’t. That gold was money in the bank: a nest egg of support in case the economy went tits-up and other assets started to lose their value.

    There’s virtually nothing you can buy with gold that will hold its value better than gold, which is why (a) it was used as a currency for so long, and (b) people like to buy and stockpile it. Now, I understand Brown expected to see a big return on his investment, but that suggests he seriously believed he’d put an end to boom and bust. Why he should have believed this delusion, I can’t imagine, unless it’s because he knows nothing about economics – which is, overall, a pretty damning indictment and suggests he was never fit to be chancellor in the first place.

    This is why I conclude that, while the manner in which he sold the gold was ill-advised, selling the gold at all was the bigger mistake.

    1. Well it does hold some value well but between 1980 and now it as fluxuated from $850 down to around $250 and back up again.

      Having looked into it (SOURCE) actually it doesn’t seem such a good hedge against inflation.

      Fiat currency can be a problem (and as a Libertarian who I’ve seen quote rothbard something I assume you’re interested in), but if one or more of the major reserve currencies were to start debasing in a serious way, actually printing money Weimar style (not QE) then I think holding a few hundred more tons of gold would be much help against the ensuing chaos. I could be wrong, but that’s my gut feeling.

      I’m not sure its true that there’s “nothing you can buy with gold that will hold its value better than gold” because there exists investment, and if gold was the best thing to hold no body would invest. Or am I misunderstanding you. It seems you fetishise Gold a little too much anyway.

      Brown probably did think he’d more or less ended boom and bust, but then even Benanke was talking about a Great Moderation, if you look at the business cycles from 1980s to the mid 2000s and the macroeconomic consensus he wasn’t completely alone, just particularly subject to hubris.

  3. FTE has a point of view, certainly – the things that don’t happen can be just as costly as the things that do.

    However. The key here is ‘safe assets’ – meaning, presumably, ones that will increase in value rather than decrease. Call me a crazy right-winger, but instead of purchasing assets, Brown could have used that money to give everybody in the country a tax rebate. After all, the state’s money is really our money, so when the state makes a ‘profit,’ it should return the difference. He still would have been a fool for selling it at such a low price (after depressing the price still further by announcing the auction), but at least we wouldn’t now be saddled with assets that are worth less than what he paid for them.

    1. Again I don’t think its totally fair to say that he sold at a low price. If you knew it was so bad why didn’t you buy all the gold you could from Brown in 1998? If you knew it would treble in price you could have mortgaged your house or sold your car or beg borrowed and stole then money and more than tripled it in a decade.

      But he didn’t and couldn’t and nor could any one else have known what would happen (Not that I need to say but see: Hayek). 10% of the loss was his fault, the massive increase since is just the market, it can’t be compared to Napoleon’s invasion of Russia.

      A rebate would always be nice but the aim was to diversify the Government’s assets, should the Government hold any assets? And if gold is the best asset to hold why should the Government have any instead of us citizens?

  4. You’re on the right tracks (although there’s a few mistakes – it was $275 in 1999, it is £700 (not dollars) today)).

    A few more points.

    On the method of sale – governments always announce their plans to sell things in advance think of bond auctions or the sale of BP. Perhaps they should have tried to hoodwink the markets – the public – but they publish monthly reserve figures so they could only do so for one month. Transparency is meant to be a good thing. In any case why should an auction lower the price of gold?

    More generally do those who say the gold shouldn’t have been sold now advocate buying more? Or selling more (half is left)? Should the level of reserves be fixed forever? If not what should determine the level? If not portfolio considerations then want? Should the British government really become a gold trader?

    On the opportunity cost – Giles point is a good one and consider another opportunity cost. The government sold BP shares for about £3 back in the late 1980s. In large part due to rising oil prices these have returned dividends and capital accumulation far in excess of the amount received by the government. Is that also a disaster?

    Finally I do think a lot of right-wing commentary on this is laughable. Gold is apparently the only asset in the world whose price is perfectly forecastable, and in July 1999 it was up, even though many miners and other central banks and so on were selling it as fast as they could.

    [My reply is even longer than Giles’]

    1. Thanks for the comment.

      Yes I played a bit fast and loose with the exact details, they’re kinda secondary to the point though, no one should come here for investment advice!

      I don’t know why an auction would other than it would allow people to take up short positions knowing that on certain days the stock of gold on sale would be larger without a necessary larger number of buyers. Its the consensus held by many people and I’m not expert enough to challenge it.

      Diversification is good as a rule, The House of Commons has certainly gone into some unusual assets. But I suppose Fine Wine has consistently beaten the Stock Market. Anyway the Gold Bug mentality does seem a little odd.

      With regard to BP we don’t know how well they would have performed had they not been sold, so its not quite the same counterfactual. I think its fairly safe to assume Gold would have followed a similar trajectory.

  5. Sceptical about the settled view among experts being auctons bad (and empirically the auctions got the same price as the market over time so no impact). note imf sold by auction in 1970s and although not doing so this time certainly preannounced its sale. The other crucial thing to note is that should the uk hold an asset that the sale of $250m worth in one go is too big for the market to handle? Thanks for replying btw.

    1. No problem. It’d be an even bigger blog to the narrative if the Government didn’t even lose money on the auctions.

      I’d be interested to see how the markets behaved over those months and see if the £Brown depressed the market£ thing shows itself. The amount of people who took short positions who didn’t subsequently lose all their money does indicate that Brown did depress the price. Hmm..

      Thanks for commenting here, I had thought of applying this logic to all the state owned enterprises sold until you mentioned it.

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