Britain was right to sell off its pile of gold
By Alan Beattie
The Treasury made the right decision not selling, says Alan Beattie
The continued run of the gold price is a global investment sensation.
Recently it broke the $1,500 an ounce barrier for the first time, 30 per
cent higher than a year ago. Surely this lays bare the extraordinary
foolishness of Gordon Brown’s announcement, 12 years ago this week, that
the UK Treasury would sell off some of Britain’s gold holdings?
Actually, no. On this one occasion, Mr Brown’s decision was the right
one. Let speculators go gambling on a shiny metal, if they want to. For
most governments in rich countries, holding gold remains a largely
pointless activity.
With hindsight, of course, Mr Brown could have gained a better price by
waiting. At current rates, the $3.5bn the UK received selling bullion
between 1999 and 2002 would have been closer to $19bn. The difference at
current exchange rates, by the way, would be enough to cover a little
over three weeks of the UK’s expected public deficit for the fiscal year
2010-2011 – not negligible, but hardly pivotal.
Mr Brown, his critics say, must be kicking himself. Similarly, the
French no doubt still suffer sleepless nights for prematurely taking
profit on their Louisiana claim by offloading it to Thomas Jefferson in
1803. And had I put my life savings on Ballabriggs at 20-1 before last
month’s Grand National, I’d be writing this on a solid platinum laptop
while being sprayed with pink champagne in my new beachfront villa in
Barbados.
That is the way of things with speculative assets. The truth is that no
one has a good explanation why the gold price is currently where it is.
The familiar story – a hedge against inflation or government insolvency
– is flatly contradicted by the low yields and inflation expectations in
US Treasury bonds. The volatility of gold (and other precious metals –
witness the huge drop in silver prices this week) merely underlines the
risk of holding it. The $1,500 landmark is a nominal price: had
governments listened to the bullion fanatics and loaded up on gold in
the last big bull market in the early 1980s, they would still be waiting
to earn their money back in real terms.
More substantively, criticism of Mr Brown’s sale also betrays a
misunderstanding of why a country such as the UK has gold at all.
In common with most rich nations, the function of British foreign
exchange reserves is not for the government to manage wealth on behalf
of the country. British citizens do that themselves. The UK does not
have a sovereign wealth fund that aims to maximise returns, and nor
should it. It is not a big net oil and gas exporter such as Norway – UK
net foreign exchange reserves are about $40bn, equivalent to 2 per cent
of nominal gross domestic product, while Norway’s sovereign fund has
$525bn, equivalent to almost 140 per cent of its GDP.
Nor does the UK pile up foreign assets by persistently selling its own
currency to manipulate the exchange rate, as does China. It is notable
that the much-vaunted official purchases of gold over the past year are
mainly by countries such as China and Russia – and, to a lesser extent,
Mexico – with big excess reserves.
UK reserves are there mainly for precautionary reasons – to intervene in
currency markets to stop a run on sterling or to pursue monetary policy
objectives. Yet gold is badly suited for this task because, despite
recent interest from private investors, a large proportion of global
above-ground stocks – 18 per cent in 2010 – is still held by governments.
Any attempt to sell off large amounts quickly risks driving down the
world price, which is what happened after Mr Brown’s announcement in
1999, leading to an international agreement between central banks to
restrict further sales.
A precautionary reserve asset held for intervention purposes whose price
is likely to fall the instant it is used to intervene is singularly
pointless. Of course, central banks selling into a rising market like
today’s may not have the same impact as in 1999, but who knows what
demand for gold will be like if and when the intervention is needed?
There remains only one other main reason for governments to hold gold –
to set monetary policy by linking the national currency to the gold
price. This remains as bad an idea as ever. It would have meant sharply
tightening monetary policy since the fall of 2008. This would have been
madness.
Private investors, and sovereign wealth funds out to make returns, can
punt their money on what they like. If they choose to plonk it down on
the blackjack table of the commodity markets, that is their decision.
But there is no good reason that governments that hold reserves for
purely precautionary purposes should feel the need to follow them.
alan.b...@ft.com