Gordon Brown’s Gold Sale Folly

Shocking news from the Sunday Times in London. Gordon Brown is an idiot.

More shocking still, his boss Tony Blair – the prime minister who led Britain to war in Iraq on spurious evidence of WMDs – doesn't always speak the truth. Their political party, New Labour, likes to bury bad news. And expert knowledge counts for nothing at Westminster.

Hence the biggest financial story in the United Kingdom right now – bigger by far according to the column inches than its record-breaking credit bubble – is that Gordon Brown "ignored advice" before selling half the nation's gold at rock-bottom prices in 1999.

You might wonder what all the palaver is about. Grant Thornton, the accountancy firm, reckons that Mr Brown cost taxpayers £2 billion by selling 400 tonnes of gold at the very bottom of the metal's 20-year bear market.

But so what? Central government in the UK gets through that much money every 36 hours. Two billion here...two billion there. Pretty soon, you're just funding a war in the desert or paying disability allowance to one-in-four people of working age.

Still, it's always good to see a national newspaper reporting a story that's only 7 years old. Now the Times can reveal that a group of leading gold dealers and investors – gathered together by the Bank of England – were shocked at the poor timing of the government's decision, even before it happened.

These experts told the Bank of England of their shock. The Bank of England told the government. The government went ahead with the sale anyway. And this is news?

The paper doesn't comment on whether these gold-market experts, given advanced warning of the Treasury's advanced warning in spring 1999, may have been in a position to use such insider information to their own advantage. But "the timing of the decision was ludicrous," says Peter Fava, then head of precious metals at HSBC.

"We told them [the BoE] – you are going to push the price down before you sell it."

That's just what happened, of course. Gold sank by almost one-tenth on the back of Gordon Brown's decision to announce his sales ahead of time.

"I was surprised they had chosen the auction method," adds Martin Stokes, a former vice-president at J.P.Morgan. "It indicated they did not have a real understanding of the gold market."

Clueless or not, however, it didn't matter. The Bank of England had no say in the matter. It only got to advise the government on HOW to sell the gold. The fact of the sale itself had already been decided by the Treasury. And since then, says the Times, the government has defied all calls to release minutes and emails written at the time.

The paper says the government is now embarrassed by its decision to sell gold. But you wouldn't know it from Gordon Brown's behavior; the guy's not embarrassed at having destroyed the UK pensions industry, for instance, or taxing dividend payments so badly that sales of mutual funds to private investors have collapsed. Why would he be embarrassed by selling gold at the end of the 20th century? Everyone else was doing it, after all.

"The deterioration of Switzerland’s public finances led to a growing awareness of the opportunity costs of maintaining the existing structure of the SNB’s assets," said vice-chairman of the Swiss National Bank, Philipp Hildebrand, in a 2005 speech. "The vast gold holdings increasingly gave rise to concern in the context of bearish market sentiments and of gold sales by other central banks. In November 1997, a partial revision of the Swiss National Bank Law increased the flexibility of the SNB’s reserve management activities."

Further legislative reforms were needed to enable the SNB to sell 1,300 tonnes of gold over the next eight years. The Swiss people duly obliged, ratifying a change in the constitution. New laws opened the door of the vault, and out went the Swiss nation's gold.

In short, Gordon Brown might have been an idiot, but he wasn't alone in being an idiot. Even before the Swiss began working to sell their gold in 1997, in fact, concerted and regular gold sales were being undertaken by the central banks of Argentina, Austria, Australia, Belgium, Canada, Luxembourg, the Czech Republic and India. In Washington, people began to discuss the possibility of gold sales by the International Monetary Fund (IMF). Just this weekend, Japan's finance minister raised the idea again.

"Japan has told the committee, 'Why not sell gold?'" says Koji Omi. And why not indeed? The IMF would no doubt find willing buyers in the Kremlin, Beijing, perhaps even Johannesburg. The South African government recently acquired gold direct from the country's own gold mining companies. Interfax reported last Thursday that Moscow is thinking of buying gold direct from Russian extraction companies, too.

And China, reports the Sunday Times, was an eager buyer of Britain's gold at Gordon Brown's giveaway auctions. "Several Asian countries including China are named by an insider as having bought the gold 'on the cheap' from the Treasury," says the paper in its exposé. "The Chinese may have made more than £1 billion from Brown’s botched sell-off."

Meantime in the spot market, gold for immediate delivery continues to rise against all paper currencies – the fiat money pumped out at will, in just the way that gold can't be, by governments in the United Kingdom, Eurozone, Japan, Australia, South Africa, US, China, Russia...

Gold closed Friday night just shy of an 11-month high. It completed its sixth gaining week on the run. Gold has now gained 6.5% in Dollar terms this year. It's up 5.2% versus the Euro and has put on 8.8% against Sterling – the same gain that it's delivered against the Japanese Yen.

And for as long Gordon Brown remains "short" of gold bullion, owning it can't be too stupid.

At least, not as stupid as Dear Prudence!

Adrian Ash
for The Daily Reckoning Australia

Editor’s Note: City correspondent for The Daily Reckoning in London, Adrian Ash is head of gold research at BullionVault.com. - giving you direct access to the current gold price, investment gold, vaulted in Zurich, and low-cost gold investing.

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