Brown’s bottom and the Toffee Top
Jan Skoyles looks at Gordon Brown’s reasons for selling half of Britain’s gold over ten years ago and asks have we reached the top of the gold market thanks to George Osborne’s rediscovered interest in our gold investments?
Last week George Osborne, never one to miss a swipe at the opposition, made the effort to remind everyone of Gordon Brown’s Bottom.
I can confirm our gold holdings have risen in value to £11 billion. This does not include the 400 or so tonnes of gold sold a decade ago for £2 billion, and which would now be worth six times that at over £13 billion pounds.
He is right; Britain’s gold would now be worth over six times that it was sold for. But is he right to be sneering about it? Perhaps not considering that, according to the Treasury, there are no plans to further increase our gold reserves.
Britain’s lost gold would pay for Olympics
Between 1999 and 2002, Gordon Brown sold 395 tonnes of his country’s gold, when the price was at a 20-year low. The average price achieved with the sales was $275.6/ounce. If the gold had been sold today then the British people would have received some £13 billion. This would have paid for the Olympics and it is more than Britain lost when leaving the ERM.
As we all know, the former Chancellor and Prime Minister has come under plenty of fire since his fateful decision. The anger Brits felt towards Brown for selling the gold has been rechanneled towards him, several times, most significantly for claiming there was no longer a boom/bust culture in the economy; we were all caught out by this in 2007 when Northern Rock collapsed.
According to the BBC’s Robert Peston, Gordon Brown and his advisors became fixated on the idea of selling the gold, ‘they hated what they perceived as the intrinsic laziness of gold. It simply sat in the vaults gleaming but earning no interest. They wanted assets that appeared to earn their keep, by generating interest payments. They also hoped and believed that rampant global inflation was a thing of the past, and that the days of gold’s soar away success would never recur.’
How wrong they were. Rampant global inflation is unfortunately very much a thing of the present and of the foreseeable future. Gold’s soar away success is something which has been current since Brown’s bottom and will continue to be, at least until the devaluation of paper money ceases.
Why sell the gold?
But was it just because of a dislike and distrust in the yellow metal?
As Philip Hammond MP stated in an interview with Max Keiser, the timings of these sales appeared inept. The government alerted the markets to the fact that there would be huge volumes of gold coming to the market, allowing front running to occur. This implies that Gordon Brown was not working to get the best price for the British taxpayers.
It was widely believed that the gold sale was in support of the budding euro and that the proceeds would be used to purchase new euros. However, according to some in the gold world, Brown’s moves were slightly more political than he originally implied.
In Jesse’s Café Americain, back in 2010, it was suggested that Brown sold the gold in order to bailout mega banking empire Rothschild and also AIG.
There is also a credible speculation that the sale was designed to benefit a few of the London based bullion banks which were heavily short the precious metals, and were looking for a push down in price and a boost in supply to cover their positions and avoid a default. The unlikely names mentioned were AIG, which was trading heavily in precious metals, and the House of Rothschild. The terms of the bailout was that once their positions were covered, they were to leave the LBMA, the largest physical bullion market in the world.
Federal involvement in the gold market is a major area of discussion and debate, something which we have touched upon many times in these research pages. After the recent fall in gold there were many accusations that it was not just the market getting spooked about the economy. But, as we also said in these pages, regardless of market rumours, the reasons to own gold are still strong, for both investors and central banks.
Time to rebuild our gold reserves?
So, after his pointed remarks about the amount of gold in our reserves, is George Osborne planning on restocking our vaults? Or is he, like Gordon Brown, using what’s left as a strategic asset?
Britain’s foreign exchange reserves are at historical lows, this weighs, heavily, on our much coveted triple-A status. Something which Osborne, no doubt, has hanging over him. What do we use our reserves for? According to the Financial Times, we use them for ‘precautionary reasons’ for instance; to stop a run on sterling or to pursue monetary policy objectives.
It seems to me that there is no better time economically, or politically, to stock up on ‘precautionary’ reserves.
Currently the official gold reserves of the UK remain relatively unchanged after the sell-off. According to the World Gold Council’s latest figures, the UK has 310.3 tonnes of gold currently which represents 17.7% of our reserves. We are currently 17th in the world for our gold holdings and according to the Treasury there are no plans to increase our gold holdings.
When George Osborne took his seat as Britain’s most powerful bookkeeper in May 2010, gold finished the month just below $1210. As I write this, gold sits at $1680. Therefore, George Osborne has also missed out on a golden opportunity to buy back some of our gold.
Brown’s Bottom and the Toff’s Top
But now that the current government are showing interest in gold again, this time positively, does this mean that we are now seeing, after Brown’s Bottom, the Toffee nosed top?
One could argue that there is little money available to him to do so. This may be, but somehow countries in Europe have managed to find the funds to increase their gold holdings. In 2011, European central banks became net buyers of gold for the first time in 20 years whilst central banks worldwide, along with official institutions, increased their gold purchases by 571%.
The WGC said of this; ‘this activity reflected a continued desire among central banks to diversify their sizeable reserves in light of credit downgrades which have brought into question the safety of holding massive amounts of US dollar and euro-denominated reserves.’
Moreover, no-one seems to be expecting gold to sink below Brown’s 20-year bottom. Europe’s gold buying activities, both banks and private investors are significant, but what is more significant is the gold buying activities of the BRICs and other emerging countries. These countries, as we have discussed before are in stronger positions than the West economically, not to mention recent moves to abandon the dollar. They are choosing to put their faith in gold rather than other currency based reserves.
As we have recently explained, the reasons for gold’s climb is not because it is sat in an ever expanding soapy bubble. It is because the fundamentals which put it there, mainly instability, systematic devaluation of our money and inflation, are still increasing (no matter what George says).
Since writing this article, The Real Asset Co. has launched the Buy Britain’s Gold Back campaign, find out how you can join in, or read more about it, below.
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