http://m.ft.com/cms/s/0/5788dbac-7680-11e0-b05b-00144feabdc0.html
Britain was right to sell off its pile of gold
By Alan Beattie
The continued run of the gold price is a global investment sensation. Recently it broke the $1,500 an ounce barrier for the first time, 30 per cent higher than a year ago. Surely this lays bare the extraordinary foolishness of Gordon Brown’s announcement, 12 years ago this week, that the UK Treasury would sell off some of Britain’s gold holdings?
Actually, no. On this one occasion, Mr Brown’s decision was the right one. Let speculators go gambling on a shiny metal, if they want to. For most governments in rich countries, holding gold remains a largely pointless activity.
With hindsight, of course, Mr Brown could have gained a better price by waiting. At current rates, the $3.5bn the UK received selling bullion between 1999 and 2002 would have been closer to $19bn. The difference at current exchange rates, by the way, would be enough to cover a little over three weeks of the UK’s expected public deficit for the fiscal year 2010-2011 – not negligible, but hardly pivotal.
Mr Brown, his critics say, must be kicking himself. Similarly, the French no doubt still suffer sleepless nights for prematurely taking profit on their Louisiana claim by offloading it to Thomas Jefferson in 1803. And had I put my life savings on Ballabriggs at 20-1 before last month’s Grand National, I’d be writing this on a solid platinum laptop while being sprayed with pink champagne in my new beachfront villa in Barbados.
That is the way of things with speculative assets. The truth is that no one has a good explanation why the gold price is currently where it is. The familiar story – a hedge against inflation or government insolvency – is flatly contradicted by the low yields and inflation expectations in US Treasury bonds. The volatility of gold (and other precious metals – witness the huge drop in silver prices this week) merely underlines the risk of holding it. The $1,500 landmark is a nominal price: had governments listened to the bullion fanatics and loaded up on gold in the last big bull market in the early 1980s, they would still be waiting to earn their money back in real terms.
More substantively, criticism of Mr Brown’s sale also betrays a misunderstanding of why a country such as the UK has gold at all.
In common with most rich nations, the function of British foreign exchange reserves is not for the government to manage wealth on behalf of the country. British citizens do that themselves. The UK does not have a sovereign wealth fund that aims to maximise returns, and nor should it. It is not a big net oil and gas exporter such as Norway – UK net foreign exchange reserves are about $40bn, equivalent to 2 per cent of nominal gross domestic product, while Norway’s sovereign fund has $525bn, equivalent to almost 140 per cent of its GDP.
Nor does the UK pile up foreign assets by persistently selling its own currency to manipulate the exchange rate, as does China. It is notable that the much-vaunted official purchases of gold over the past year are mainly by countries such as China and Russia – and, to a lesser extent, Mexico – with big excess reserves.
UK reserves are there mainly for precautionary reasons – to intervene in currency markets to stop a run on sterling or to pursue monetary policy objectives. Yet gold is badly suited for this task because, despite recent interest from private investors, a large proportion of global above-ground stocks – 18 per cent in 2010 – is still held by governments.
Any attempt to sell off large amounts quickly risks driving down the world price, which is what happened after Mr Brown’s announcement in 1999, leading to an international agreement between central banks to restrict further sales.
A precautionary reserve asset held for intervention purposes whose price is likely to fall the instant it is used to intervene is singularly pointless. Of course, central banks selling into a rising market like today’s may not have the same impact as in 1999, but who knows what demand for gold will be like if and when the intervention is needed?
There remains only one other main reason for governments to hold gold – to set monetary policy by linking the national currency to the gold price. This remains as bad an idea as ever. It would have meant sharply tightening monetary policy since the fall of 2008. This would have been madness.
Private investors, and sovereign wealth funds out to make returns, can punt their money on what they like. If they choose to plonk it down on the blackjack table of the commodity markets, that is their decision. But there is no good reason that governments that hold reserves for purely precautionary purposes should feel the need to follow them.
