A history lesson still not learned........

Tuesday 5th May 2015

 

A history lesson still not learned........

 

"Brown's golden shot was not the miss his critics would have you believe", The Times p.43

To recap the facts : between 1999 and 2002 the Bank of England sold about 395 tonnes of gold, 55% of its gold reserves, at an average price of about $275 per ounce. Almost immediately after the B. of E. had completed its sales, the gold price began its long-term bull run that saw a peak of $1,921 per ounce in 2011.

 Oliver Kamm argues that selling such a chunk of the UK's assets at the bottom of the market does not constitute incompetence on behalf of Mr Brown, and makes a number of points in defence of his decision :

     At that time, over 40% of reserves were held in gold, an unhealthily high number.

    It was perfectly sound thinking to invest the proceeds of the sale in a broader range of foreign currency   assets.

    Holding gold doesn't generate interest or dividend payments.

    It's easy to backtrade with the benefit of hindsight.

 

All of the above are true, and we can also accept Mr Kamm's further point that it's not the job of either the chancellor or the central bank to "punt" on the price of gold. It's just that when they do have to act in the market, do they have to do it so badly ? It was not the decision itself that was so poor (let's be generous, here), but the handling of its implementation. Mr Brown announced to the world his intention to sell the B of E's gold well in advance, artificially depressing prices and allowing traders to pick up cheap gold in the near certainty that prices would rally as soon as the sales were completed. Of course, he sold at the lows, because he created the conditions that made it inevitable. How many billions would have been saved if he had just been a little more market-savvy? Some of us can well remember the incredulity of commodity traders at Mr Brown's strategy.

It's unlikely that the former Chancellor has ever acknowledged any fault in the matter.  We can only hope some lessons have been learned somewhere in case a similar situation crops up again in the future. It won't be in gold, though.