Those Bank of England Gold Sales, 25 Years After the 'End of History'
Thursday, 5/02/2024 11:39
How the Brown Bottom happened, why it matters today...
TUESDAY next week will mark 25 years since the UK Government said it would start selling off half the nation's gold reserves two months later,
writes Adrian Ash in this note sent to DppsVault users in their latest Weekly Update
email.
Gold's price sank on the news, dropping to new 2-decade lows.
That was close to rock-bottom, as it turned out...
...and pretty much the lowest prices in history in real terms.
News of the sales caused
a lot of fuss back in May 1999.
It caused
more fuss on the 20th anniversary in May 2019...
...and it's already got
more coverage again this spring ahead of the silver anniversary.
So let's not waste time unpicking the whole saga here. Because only 3 things matter today.
First, everyone was to blame, not just the UK's
late-1990s finance minister (and short-lived Prime Minister) Gordon Brown.
Yes, his ham-fisted fingerprints were all over the announcement. And yes, the timing and method seem willful. But investors were AWOL (piling into DotCom shares instead)...
...while the media kept saying what a dumb investment gold was...
...and even gold miners had been shorting the metal, borrowing and selling it to lock in the price of future production, and thus helping it fall still lower in price.
As for sovereign nations, the UK was far from the first or largest gold holder to dump bullion from its reserves. And why not? The
fin de siecle, after all, marked
the end of history...the inevitable triumph of "Western liberal democracy as the final form of human government" to quote the
zeitgeist's handbook. Who
needed gold when we had Alan Greenspan running the Fed?
Canada, Australia and Argentina sure didn't. They had all slashed their state holdings by 1998. Austria and the Netherlands had both halved their gold reserves too, while Belgium...
...like them, a founder of the single Euro project due to launch at the turn of the Millennium...
...had already sold 40%. France would then join the fun in 2004, selling a fifth of its bullion over the next five years. That left only the USA, Germany and Italy (still gold's top three hoarders today on the official data) as unwavering holders among rich Western economies.
Most urgently, the UK announcement came just a month after the USA backed called for the International Monetary Fund to sell gold, and it was only 3 weeks after voters in Switzerland had passed a referendum ending the Franc's gold backing in law.
That freed the Swiss National Bank to start cutting its massive holdings.
Which it did.
But again, the big picture trend wasn't new.
See how state control of gold peaked around WW2...
...back when private ownership of gold was illegal in the USA and
Nazi troops headed first to the central bank of the neighboring nations they flattened and invaded?
Then see where its decline slowed from a plunge to a slide around 2010...?
The global financial crisis put a stop to Western central banks selling gold. It also spurred Russia and most dramatically China to start hoarding...
...because Washington, Frankfurt, London and Tokyo were actively devaluing the 'reserve' currencies pouring into Moscow and Beijing's central banks to pay for all the gas and gadgets Russia and China churn out.
No, none of the Western central banks selling gold around the Millennium have yet re-invested. But a growing number of nations on 'our side' have bought...
...including the Czech Republic, Hungary, Ireland, Japan, Poland, Singapore...
...alongside many of the friendlier 'rest' ranging from Brazil, India and Mexico to Saudi Arabia and Thailand.
Lesson for today? It's always darkest just before things go utterly black. But trends come and go. Even if, in gold, things can take a few decades or more to turn around.
Second, the UK's decision really was awful. It gave the market 2 months' notice before starting to sell, a move that caused outrage at the time but only looks worse in hindsight. Because little known back then, the Bank of England...
...seeking a small yield from the nation's gold on behalf of its owner, the Treasury...
...had
already lent out half as much as bullion as it would divest, literally handing the market the metal it needed to front-run the sales between 1999's May announcement and the start of sales that July.
The Bank then sold some 395 tonnes of bullion at a series of auctions ending May 2002, just less than 8% of the world's net official-sector sales across the three decades ending 2010. It achieved an average price of $275 per Troy ounce, almost $13 below the London price on the eve of the announcement, and $900 below gold's average price since the sales ended.
Today the precious metal is trading above $2300, worth four times what it bought a quarter-century ago in real terms after UK inflation. And in nominal terms, selling all that bullion between July 1999 and March 2002 raised £15 billion less than if the UK had sold over the 33 months ending this April.
But really, that's nothing. The Bank of England is on track to lose £100 billion on its QE bond purchases according to the Office for Budget Responsibility...
...selling now that interest rates have jumped (and bond prices sunk) after buying when bond yields were low (and prices were high).
That's set to lock in a loss worth well over 4% of one year's GDP. Unlike the 'missed profit' of Gordon Brown's gold sales, it's also a cost borne by taxpayers under a deal between the Bank and Treasury...
...a dreadful price after the public acted so selflessly, and without being asked, in "
maintaining financial stability across the United Kingdom's banking system."
Lesson for today? The UK's gold error 25 years ago was, in cash terms at least, a drop in the bucket compared to the Western world's monetary meddling since then.
Third and last,
don't blame gold's 1999-2002 price lows entirely on Western central banks selling off so much metal.
Oh sure, the 1999-2002 lows in the gold price soon became known as the Brown Bottom.
But 3 decades earlier, central-bank sales had met such a rush from investors that they
killed what remained of the Gold Standard in 1971.
Heavy sales in the late 1970s then coincided with gold prices surging to what remain all-time highs for US investors in real terms.
Lesson for today? Every sale needs a buyer, but who those people are...and how their decisions go together to decide the direction of prices...are far from fixed.
Right now
the rich West is selling gold yet again today, but less aggressively than 25 years ago and this time only from private investors, rather than from national reserves.
Today's net selling also contrasts with the Western world's post-financial crisis outflows of gold in 2013-2015, even though...just like then...the
eager buyers live mostly in China, whether as private households, investors or central-bank managers.
The big difference, of course, is price. Gold in 1999 had rarely been cheaper in real terms. Whereas 25 years later it's now running at
the most valuable since the Wars of the Roses on our rough-and-ready analysis of the best available data.
Does that mark the top? Not even the most die-hard technical analyst would trust the lines on a chart using estimates for long-run inflation and gold prices made over 5 centuries later.
But whatever comes next, the UK and wider Western world's central-bank gold sales of 25 years ago started ugly and continue to age badly. Who knows whether, this time, China's central-bank bosses are mispricing the ultimate crisis investment.
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