Tuesday, December 01, 2015

Brown's poison pills part 7: Gold reserves

I've added this post to the series in response to a comment on an earlier post.

As Thomas Pascoe wrote in the Telegraph in 2012 and you can read here,

"A great deal of Gordon Brown’s economic strategy would strike a sane man as troubling.

Not a great deal was mysterious. The orgy of consumption spending, frequent extensions of the cycle over which he would “borrow to invest”, proclamations of the “end of boom and bust”: these are part of the armoury of modern politicians, of all political hues.

One decision stands out as downright bizarre, however: the sale of the majority of Britain’s gold reserves for prices between $256 and $296 an ounce, only to watch it soar so far as $1,615 per ounce today."

Brown sold off almost 400 tonnes of gold between 1999 and 2002, and two aspects of this were particularly unusual.

First, he announced the sale well in advance, contrary to previous practice, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory.

Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply.

As Pascoe wrote

"It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was."

Pascoe argues that this was a first, and concealed, bank bailout - enabling the banks to recover from the effects of mismanagement by a huge, but hidden, subsidy from the taxpayer.

This cost the taxpayer billions, but that was not the worst aspect of the story.

The hidden bailout was never properly explained to parliament, but that is not the worst thing either.

Apart from the direct financial cost, the worst thing about this was that it was both a wrong signal and a missed opportunity. As Pascoe wrote,

"The one thing politicians ought to have bought with that money was a lesson in the structural restraints which needed to be placed on banks now that the principle that they were ultimately public liabilities had been established."

"It was a lesson which could have acted to restrain all players in the credit market boom of the 2000s.

It was a lesson which nobody learnt."

Instead of taking the opportunity to review regulation and pressure the banks to act responsibly, Brown sent the signal that they were "too big to fail" and the government would always bail them out.


Jim said...

I am glad you did add it Chris, and a good post it is too. Its something that has narked away at me for a long time.

Jim said...

On a more humorous note,

I have heard from people the low point in the price of gold, on the spot price history charts is still sometimes refereed to as "the Brown Bottom". I am not sure how true that is as I am no speculator for short selling, but even if its not its quite fitting.

Chris Whiteside said...

Thanks, Jim, and yes, that is a very appropriate name for the nadir of the Gold price.