The decision made by then chancellor Gordon Brown to sell over half of the UK’s gold reserves on May 7, 1999, has been widely regarded as one of the worst financial blunders by the government. The announcement was aimed at diversifying and strengthening Britain’s reserves by reducing the proportion held in gold.
However, the timing of the sale proved disastrous, as it coincided with the bottom of the gold market. This ill-timed move ultimately led to significant losses for the Exchequer, amounting to billions of pounds in lost profits.
As the 25th anniversary of this infamous decision approaches, the price of gold has reached record highs. This outcome prompts a retrospective analysis of what went wrong and the long-term implications for the UK.
Telegraph Money delves into the aftermath of Gordon Brown’s decision, exploring its impact on the nation’s finances and the lessons learned from this costly misstep in economic policy.
Build-up
In 1999, gold was increasingly viewed as a “barbarous relic,” a term coined by economist John Maynard Keynes in 1924. The precious metal had endured a two-decade bear market, during which its real value plummeted by 80% from its peak in 1980. This decline in value prompted several central banks worldwide to consider selling off portions of their gold reserves.
Despite gold’s diminished appeal as an investment, central banks continued to hold the metal as a safe haven asset. Gold serves as a hedge against various economic uncertainties, including inflation, currency devaluation, and fiscal instability. Therefore, it is regarded as a valuable reserve asset that can be utilized as a last resort in times of crisis.
In this context, Gordon Brown’s decision to sell a portion of the UK’s gold reserves was not unusual. The UK government owned 715 tonnes of gold, managed by the Bank of England on behalf of the Treasury. The plan to convert the proceeds from the sale into foreign currencies—allocated as 40% US dollars, 40% Euros, and 20% Yen—was intended to generate interest for the government, unlike gold.
However, the timing and manner in which the sale was executed would have far-reaching consequences that are still felt today. The decision sparked controversy and criticism, highlighting the importance of strategic decision-making and communication in matters of economic policy.
The announcement
Prior to 1999, other central banks typically offloaded their gold reserves quietly on the global markets, announcing details of the sale only afterward. However, the UK government took a different approach, publicly disclosing its intention to hold a series of auctions for 125 tonnes of gold reserves, starting in July of that year, with plans to sell a total of 415 tonnes by 2002.
The Treasury justified this decision by stating its aim to achieve a better balance in the portfolio by increasing the proportion of reserves held in foreign currencies. With gold making up approximately 50% of the UK’s foreign currency net reserves, valued at $6.5 billion out of $13 billion, the Treasury argued that this heavy reliance on a single volatile asset, which earned no interest, was excessive.
However, the announcement caught the markets off guard, creating a significant stir. Adrian Ash, director of research at BullionVault, described it as landing like a bombshell, indicating that the Treasury may not have anticipated the magnitude of the reaction. The decision-making process and communication surrounding the announcement were criticized as poorly executed.
Britain’s top gold traders, informed of the planned sale only on the day of the announcement at a meeting at the Bank of England, expressed shock and concern. They warned that publicly revealing the timings and amounts for sale in advance would likely prompt traders to short the asset, leading to a further decline in gold prices.
Indeed, the price of gold, which stood at $282.40 an ounce on the day of the announcement, dropped by 10% by the time of the first auction in July. Critics, including Peter Fava, then head of precious metal dealing at HSBC, regarded the decision as disastrous and questioned its rationale.
Despite the government’s argument that a secret sale could eventually leak out and further depress prices, critics argued that the manner in which the announcement was made did not enhance the UK’s reputation in international markets. They suggested that the decision might have been better received had it been communicated more effectively or conducted differently.
The sale
The sale of 395 tonnes of gold by the Bank of England on behalf of the Treasury, at prices ranging between $256 and $296 per troy ounce, yielded a total of $3.5 billion. However, in hindsight, this decision proved to be highly unfavorable, as gold prices soared in the following years.
Gold reached a record high of $2,083 per troy ounce on the London gold benchmark on March 4, experiencing a remarkable bull run over the past decade. In the spot market, gold hit an all-time high of $2,135 in December of the previous year. Consequently, the 395 tonnes of gold sold by the Treasury would now be valued at $26 billion for the UK. The sale, therefore, occurred at a historic low in the market, leading this period to be dubbed “Brown’s Bottom” by traders.
One significant reason for the depressed sale price was the UK’s symbolic and historical importance in the gold market. The Bank of England had long held and managed gold reserves for over 40 central banks and monetary institutions, lending credibility and stability to the market. Therefore, the UK’s decision to sell its gold reserves sent shockwaves through the market, undermining confidence and sentiment.
The handling of the sale by the government was widely criticized, with backbench Conservative MP Peter Tapsell suggesting in the House of Commons that conspiracy theories were circulating in the City. These theories alleged that influential foreign finance houses had taken substantial short positions on gold, necessitating intervention from the Treasury to prevent a price rise.
Clifford Smout, then Head of Foreign Exchange at the Bank of England, denied any involvement in such a conspiracy. There were also suspicions that Gordon Brown, then Chancellor of the Exchequer, was attempting to support the newly launched euro by selling off gold reserves. However, these allegations were vehemently denied by the Bank of England, dismissing them as extreme conspiracy theories.
The immediate aftermath
The UK government’s announcement of the sale of its gold reserves prompted other western nations to publicly reaffirm the importance of holding gold in their reserves. Jean-Claude Trichet, then governor of the Bank of France, emphasized that France, Germany, Italy, and the US had no plans to sell their gold. Alan Greenspan, the chairman of the Federal Reserve at the time, echoed this sentiment by stating, “Gold still represents the ultimate form of payment in the world.”
Moreover, the mishandling of the sale led European central banks to implement regulations regarding gold sales. Concerns were growing over the impact of uncoordinated sales and lending of gold by central banks on the market, potentially driving down prices.
Consequently, on September 26, 1999, 15 European central banks, including the Bank of England, reached an agreement to limit their gold sales to 400 tonnes annually over the next five years. Additionally, they committed to announcing sales to the market beforehand. Importantly, the central banks also pledged not to increase their gold lending beyond the 2,119 tonnes already leased out.
This announcement had a significant impact on the gold market, causing a sharp spike in prices with a two-week gain of 25%. The newfound transparency in gold trading and the removal of uncertainty surrounding central banks’ sales intentions contributed to this surge in prices.
Effect on the UK
The proceeds from the sale of gold were reinvested back into the UK’s reserves, which had no immediate impact on the country’s consumers or economy since the funds were not utilized for public spending or debt repayment. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, noted that reserve assets like gold primarily serve precautionary purposes, such as intervening to prevent currency crises, rather than being managed for wealth accumulation.
However, critics argue that the mishandled sale tarnished the UK’s reputation globally. Ross Norman, chief executive of Metals Daily, emphasized that depleting a significant portion of the country’s reserves makes it challenging to rebuild, thus harming the UK’s standing.
The sale was also seen as embarrassing for the Bank of England, given its prominent role in the bullion market, despite lacking control over the decision, which was made by the Treasury. There were reports suggesting that Eddie George, then-governor of the Bank of England, privately opposed the sale, fearing it would weaken the Bank’s influence in the financial hub of the City of London.
However, George defended the decision before a Select Treasury Committee, stating that while emotions may run high regarding gold, from a portfolio management perspective, selling the gold was rational.
Would there ever be another sale?
In contrast to the 1990s when central banks were eager to offload gold reserves, the situation today is reversed. Over the past two years, numerous central banks, particularly those not aligned with Western powers, have been purchasing physical gold in significant quantities. Factors such as the COVID-19 pandemic, rising inflation, and geopolitical tensions like the conflicts in Ukraine and the Israel-Gaza region have bolstered gold’s appeal as a safe haven asset.
The ownership of gold held within a nation’s own vaults provides a sense of security, as it cannot be frozen or accessed by external parties. Countries like China have been actively increasing their gold holdings to reduce reliance on the US dollar, with China acquiring 225 tonnes of gold in 2023 alone.
However, the likelihood of the UK engaging in either buying or selling gold is extremely low. Selling any portion of its gold reserves at this stage would be viewed internationally as a sign of severe financial distress, which would be counterproductive. Similarly, attempts to acquire more gold could signal concerns about the stability of the global financial system.
According to analysts, Western central banks remain cautious and hesitant to make any significant moves regarding gold due to the public relations backlash they faced from the sales conducted 20 years ago. The stigma surrounding those sales has left policymakers reluctant to take any actions regarding gold that may appear irrational or poorly timed.
Lessons for consumers
Private investors can learn from Mr. Brown’s flawed sale that herd mentality can pose risks in financial markets. The widespread selling of gold by major nations during the late 1990s, driven by enthusiasm for tech stocks and geopolitical optimism, demonstrated this phenomenon. However, since the low point in gold prices in 1999, physical bullion has outperformed all UK asset classes significantly.
The appreciation in gold prices underscores the importance of including gold in an investment portfolio. Analysis conducted by BullionVault indicates that allocating just 10% of a portfolio, which is otherwise divided 60:40 between UK equities and bonds, could have increased annualized returns from 5% to 5.6% over the past 25 years. Additionally, such an allocation would have improved the worst five-year returns of private investors over the last half-century, ending in 2022, from 0.6% to 1.6% per year.