Imagine that you have half of all your savings tied up in an asset that is not just volatile in nature but has more or less halved in value in real terms over the past 10 years.
This asset produces no profit and pays no dividends. There is no technical reason for anyone to want it or to buy it from you. It just sits there, losing value. What would you do?
That was broadly the situation facing the UK Government, and Chancellor Gordon Brown in particular, 20 years ago this week. The asset in question was the UK’s reserve of around 700 tonnes of gold - and I think you know what happened next.
Over three years from May 1999 to March 2002 the UK auctioned off 395 tonnes of those reserves and bought foreign currencies with the proceeds. At the point of the first sale, gold was worth $282 an ounce, having fallen from a peak in 1980. Besides a few relief recoveries the price had been heading downwards throughout that period. But from practically the moment of that sale the gold price went into a steep climb. It peaked once again in 2011 and has settled since at about the $1,250 level we see today.
There have been few higher profile cases of selling at the bottom of the market than Gordon Brown’s flogging of Britain’s gold, and it has hung like the proverbial albatross around his neck ever since. It even featured in a negative political ad campaign for the 2010 General Election which Brown, then Prime Minister, lost. Brown was the anti-Midas.
Calculating the exact cash cost of the sale is difficult because you need to take account of the return made on £3.5bn of currencies that were bought with the proceeds, and I haven’t been able to find an authoritative calculation of that, but it’s fair to say the loss was a large one running into several billion pounds.
Does that fact alone render Brown’s decision wrong? There are certainly many who argue that there were sound financial planning reasons for the sale and if you consider the scenario facing the Chancellor, he took action that any respectable financial adviser would suggest in those circumstances - diversify.
In further defence (don’t worry - the prosecution is coming) he was not alone and many other countries were also selling down their reserves. The link between gold and the real value of money had been loosened by the discarding of the gold standard decades before, and the unpredictable nature of the gold price meant that it was ill-suited to the job of being a foreign reserve - which is to act as a backstop in case you need to support a falling currency.
All these arguments were made in defence of the sale at the time, and not just by the Government.
But there was also severe criticism of the sale. Even if accepting of the rationale, many asked ‘why now, and why this much?’
The news of Britain’s sale - which was leaked, not announced - itself hurt gold prices because the market knew supply would increase. That was entirely foreseeable. Indeed, soon after the UK started selling, and in an apparent rebuke to the British Chancellor, other governments around the world agreed rules to cap sales to prevent disorderly price falls.
Brown was arguably also guilty of believing his own doctrine about ‘no more boom and bust’. He had recently handed the Bank of England independence to target inflation and clearly believed that rapidly rising prices had been consigned to the past. Gold is seen as a hedge against inflation and the rest of the world was clearly not yet ready to believe that the risk of inflation had gone away for good.
Finally, the then Chancellor was probably too dismissive of the enduring allure of gold. Purists like to dismiss the commodity on the same grounds that Brown did - that it doesn’t do anything productive or useful, like providing an income stream. Yet the period since then has shown that when faith in other assets is rocked, it is to gold that investors turn, as they have done for thousands of years. Hence the mantra that you should ‘always hold gold’.
For investors today there are many ways to get exposure to the metal. The Investec Global Gold fund buys share in gold mining companies, which are strongly linked to movement in the gold price.
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