The worst financial decision in history

The worst financial decision in history

Today is a journey back in time.

To a time when teens wore their pants below their buttocks.

When you could fill up your Commodore or Falcon for less than 74 cents a litre.[1]

When roughly one third of adult Australians had a mobile phone…[2]

A moment in history when connecting to the internet sounded like ET phoning home.

The digital age was here. The new economic age was coming.

And we made sure we ditched all old assets to ready ourselves for the future.

Swapping hard money for paper money

In November 1997, then Treasurer Peter Costello announced to the Australian public that he was about to sell two thirds of our gold. He told us gold ‘no longer plays a significant role in the international financial system.

In one day, our government sold 167 tonnes of the yellow metal, netting about $400 per ounce.

Overall, the sale scored Australia about $2.4 billion, which was used to pay off some debts.[3]

The move effectively suppressed the gold price. Hundreds of tonnes of gold for sale drove the price down over the next few months.

Incidentally, it seems China decided to buy up our sloppy seconds. It’s rumoured the Chinese picked up some of the gold we so carelessly sold to the lowest bidder.[4]

The thing is, we weren’t the only ones selling our gold.

A new industrial age was taking over the US.

Tech stocks were hot. Precious metals were not. The euro was confirmed and would start circulating in a few more years.

Plus, there was Greenspan.

A belief coursed through the monetary system that US Federal Reserve Chairman Alan Greenspan, along with the US dollar, was the backbone of modern money practices.

So much so that The New York Times ran a piece titled ‘Who Needs Gold When We Have Greenspan?’:

Is gold on its way to becoming just another commodity? The people who run the world’s financial system are doing their best to secure that fate for the metal that once was viewed as the only “real” money.

‘…The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.[5]

Globally, central banks were dumping gold.

Germany, France, Austria, Sweden and Argentina all sold their gold into the late 90s.[6]

Switzerland held a contentious referendum about selling its gold. It went ahead, and some 1,300 tonnes of its total 2,590-tonne gold hoard were dumped.

Belgium, Canada and the Netherlands sold a collective 1,590 tonnes in the late 90s. By 2002, Canada didn’t have an ounce of gold in its vaults.

The future was here, and gold was nothing more than an attachment to old-world money.

And then came the most famous of all gold sales…

Brown’s Bottom

This May marked 20 years since Brown’s Bottom.

A time when the UK decided to sell 401 tonnes of its total 715-tonne gold stash.

History now considers it the worst investment decision the UK ever made…

On 7 May 1999, the UK Chancellor of the Exchequer, Gordon Brown, announced that he would sell half of the UK’s gold.

Why on Earth would the world’s gold centre opt to sell more than half of its supply of the precious metal?

The official line is that Brown sold the gold to move into securities that would actually pay interest to the UK’s Treasury.

Gold, which pays no yearly return and costs money to store, was a financial drain on the country at the time.

The yellow metal was nothing more than a legacy asset from a bygone era.

Another argument put forward is that the new millennium was approaching, and there was excitement about the future. As stated earlier, a new currency — the euro — would begin circulating in a little over a year.

Plus, there was Greenspan at the top of the Fed — and an unwavering belief that Greenspan could do no wrong.

There are also rumours that Brown sold all the gold to bail out the UK banks.

There is a persistent whisper that a major US bank was short selling gold, and, had someone tried to redeem it, it would technically make the bank insolvent.[7]

As the tale goes, Brown was faced with either a global collapse in the banking system, or selling the gold to drive the price down just enough to allow this major bank to buy back the gold at lower prices.

Whether the rumour is true or not doesn’t matter.

The point is, while Brown’s decision to sell some 401 tonnes of gold was ill-fated, he wasn’t the only one.

By the time Brown sold more than half of his country’s gold, most of the other central banks had already done it.

The difference? Brown just happened to be selling into the bottom of the gold price.

No Greenspan and no gold

Two decades later, there is no Greenspan running the Fed.

The US dollar gold price per ounce is now four and a half times higher than it was in the late 90s.

Western central banks — in their rush to dump assets and support paper money — essentially cost their countries billions in foreign reserve assets.

Only a handful of central banks in that time have been increasing their gold stores.

The big buyers of gold now are the central banks in India, Russia, Poland and China.

These central banks are paying billions of dollars to secure gold, despite the perceived high prices.

That tells us they understand the importance of the yellow metal.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia