Sale of UK gold reserves, 1999–2002

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The sale of UK gold reserves was a policy pursued by HM Treasury over the period between 1999 and 2002, when gold prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.[1][2][3][4][5][6]

The period takes its name from Gordon Brown, the then UK Chancellor of the Exchequer (who later became Prime Minister), who decided to sell approximately half of the UK's gold reserves in a series of auctions. At the time, the UK's gold reserves were worth about US$6.5 billion, accounting for about half of the UK's US$13 billion foreign currency net reserves.[7]

Events[edit]

The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce.[8] The official stated reason for this sale was to diversify the assets of the UK's reserves away from gold, which was deemed to be too volatile. The gold sales funded a like-for-like purchase of financial instruments in different currencies. Studies performed by HM Treasury had shown that the overall volatility of the UK's reserves could be reduced by 20% from the sale.

The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999.[1] With many gold traders shorting, gold reached a low point of US$252.80 on 20 July.[8] The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.[8] By 2011, that quantity of gold would be worth over $19 billion.

To deal with this and other prospective sales of gold reserves, a consortium of central banks - including the European Central Bank and the Bank of England - were pushed to sign the Washington Agreement on Gold in September 1999, limiting gold sales to 400 tonnes per year for 5 years.[7] This triggered a sharp rise in the price of gold, from around US$260 per ounce to around $330 per ounce in two weeks,[7] before the price fell away again into 2000 and early 2001. The Central Bank Gold Agreement was renewed in 2004 and 2009.

Cost[edit]

Gold prices remained relatively low until 2001, when the price began consistently rising in a protracted bull market. By 2007, the price of gold had reached US$675, and the loss to the UK taxpayer was estimated at more than £2 billion, as the Euros bought with the proceeds had also risen in value.[1] The gold price briefly passed US$1,000 per ounce in March 2008,[9] before reaching all-time highs of $1,043.77 on 6 October 2009[10] and $1,048.40 on 7 October 2009,[11] by which time the loss to the UK taxpayer was approximately £4 billion. Gold prices continued to rise, reaching a new all-time high of US$1,896.50 per ounce at the London morning Gold Fix of 5 September 2011.[12]

Analysis[edit]

Brown's actions have attracted considerable criticism, particularly concerning his timing, his decision to announce the move in advance, and the use of an auction. The decision to sell gold at the low point in the price cycle has been likened[who?] to the mistakes in 1992 that led to Black Wednesday, when the UK was forced to withdraw from the European Exchange Rate Mechanism, which HM Treasury has estimated cost the UK taxpayer around £3.3 billion.[1]

More recently, it has been suggested that the sale, and its seemingly inept management, was a deliberate attempt to drive down the gold price in order to rescue several banks which had highly leveraged short positions in gold.[13][14] [15]

See also[edit]

References[edit]