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Why Britain is still paying the price for Gordon Brown’s bullion blunder

The announcement stunned the markets, however. Adrian Ash, director of research at BullionVault, an online investment gold service, said: “It landed like a bombshell. I don’t think the Treasury expected it to make as much noise as it did. It was so cack-handed how they handled it.”

Britain’s top gold traders had only been told earlier that day about the planned sale at a meeting at the Bank of England and were shocked by the news. They explained to Bank officials that gold prices tend to move in decades-long cycles, with the price probably near its bottom and likely to increase in the coming years.

They also warned that revealing the timings and amounts for sale so far in advance would cause traders to short the asset – betting on the price of gold falling – which would drive gold down further.

“The timing of the decision was ludicrous. We told them, ‘You are going to push the gold price down before you sell’,” Peter Fava, then head of precious metal dealing at HSBC, told The Sunday Times in 2007. “We thought it was a disastrous decision; we couldn’t understand it.”

Sure enough, the price of gold, which was $282.40 an ounce on the day of the sale’s announcement, had fallen 10pc by the time of the first auction in July. “It was done in a fairly clunky way”, Philip Shaw, chief UK economist at Investec, said of the Government’s announcement. “It probably didn’t do the UK’s standing in international markets much good.”

The Government said a secret sale would have eventually leaked out and provoked rumours that would have pushed the price down further. The announcement of a series of auctions, rather than selling gold through the normal twice-daily price fix, would also increase the number of prospective buyers who could bid “with greater confidence about future supply”, the Government argued.

The sale

Eventually, 395 tonnes of gold were sold by the Bank of England on the Treasury’s behalf; the price ranged between $256 and $296 a troy ounce, with an average of $276, and made a total of $3.5bn.

Gold reached a record high of $2,083 a troy ounce on the London gold benchmark on March 4, having enjoyed a tremendous bull run over the past decade. In the spot market, gold reached an all time high of $2,135 in December last year. The 395 tonnes sold off by the Treasury would now be worth $26.6bn for the UK. 

The gold, in other words, was sold at a 20-year-low in the market, and this period has since been nicknamed “Brown’s Bottom” by traders.

One key reason that the sale price was so depressed was that the UK was considered symbolically and historically important in the gold market, with the Bank of England holding and helping to manage gold reserves for more than 40 central banks and monetary institutions at the time.

“For the UK to be selling, it was like, ‘oh wow, this stuff really is finished’. So sentiment wise, it really did knock a hole in gold”, Mr Ash said.

The Government’s handling of the sale was considered so poor that the backbench Conservative MP Peter Tapsell told the House of Commons in June 1999 that “conspiracy theories are widely circulating in the City” that “famous foreign finance houses” had taken out such dangerously large short positions on gold over the previous years that they needed their friends at the Treasury to kill any prospect of a price rise in the metal.

The Bank of England’s then Head of Foreign Exchange, Clifford Smout, denied any conspiracy “with persons known or unknown”. Mr Brown was also suspected of attempting to support the newly launched euro. This was also denied by the Bank of England, which described the idea as “conspiracy theory gone to extreme”.

The immediate aftermath

The Government’s announcement of the sale prompted other western nations to publicly defend having the asset in their reserves. Jean-Claude Trichet, governor of the Bank of France at the time, said that France, Germany, Italy and the US would not sell their gold. In the US, Alan Greenspan, the then chairman of the Federal Reserve, responded to the UK’s sale by saying: “Gold still represents the ultimate form of payment in the world.”

The poor handling of the sale also pushed European central banks to set some rules around gold sales. There was growing concern that uncoordinated sales and lending of gold by central banks were causing issues for the market and driving down prices.


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