£2 billion blunder in the bullion market
Chancellor ignored advice on sell-off
Holly Watt and Robert Winnett
GATHERED around a table in one of the Bank of England’s grand meeting
rooms, the select group of Britain’s top gold traders could not
believe what they were being told.
Gordon Brown had decided to sell off more than half of the country’s
centuries-old gold reserves and the chancellor was intending to announce
his plan later that day.
It was May 1999 and the gold price had stagnated for much of the decade.
The traders present — including senior executives from at least
two big investment banks — warned that Brown, who was not at the
meeting, could barely have chosen a worse moment.
In the room, just behind the governor’s main office, they cautioned
that gold traditionally moved in decades-long cycles and that the price
was likely to increase. They added that even if the sale were to go ahead,
the timings and amounts should not be announced, as the gold price would
“The timing of the decision was ludicrous. We told them you are
going to push the gold price down before you sell,” said Peter Fava,
then head of precious metal dealing at HSBC who was present at the meeting.
“We thought it was a disastrous decision; we couldn’t understand
it. We brought up a lot of potential problems at the meeting.”
Martin Stokes, former vice-president at JP Morgan, who was also present,
said: “I was surprised they had chosen the auction method. It indicated
they did not have a real understanding of the gold market.”
According to other sources, however, Bank of England officials told those
present they had “little say” about what was going to happen
and that they were “doing what they were told”. This was a
decision made by Brown and his inner circle, who appeared uninterested
in their expert advice.
Ian Plenderleith, the senior Bank executive hosting the meeting, is nevertheless
understood to have compiled a note on the meeting for the Treasury. It
is one of several key documents that are thought to disclose the warnings
ignored by ministers.
Eight years on, the advice appears even more pertinent.
The price of gold has almost trebled and the loss to the taxpayer has
been calculated by one leading firm of accountants at more than £2
The decision to sell 400 tons of gold is seen in City circles as a financial
bungle on the scale of the Tories’ “Black Wednesday”
that cost the taxpayer £3.3 billion, according to Treasury estimates.
Dominic Hall, a former gold dealer who now runs thebulliondesk.com, a
website for the gold market, said: “Brown was keen to throw mud
at the opposition over Black Wednesday but this was a financial disaster
on a similar scale.”
As Brown inches closer to the premiership — he had his first private
meeting with President George W Bush in Washington on Friday — his
record as chancellor is coming under increasing scrutiny. For the past
18 months The Sunday Times has been battling the Treasury to release the
advice it received on the gold sales under freedom of information laws.
Brown’s department has sought — so far successfully —
to use a range of legal exemptions to block disclosure.
In its last response to requests by The Sunday Times, the Treasury stated:
“We have decided that it is not in the public interest to release
Inquiries by this newspaper, however, have uncovered new details that
Brown’s political opponents say raise fresh questions over his style
of leadership and his apparent failure to heed advice from experienced
officials. It follows damaging revelations last month when the Treasury
was forced to disclose official documents showing how the chancellor ignored
similar warnings over his 1997 tax raid on pension funds.
This weekend key insiders involved in the discussions to sell off Britain’s
gold revealed how Brown railroaded through the decision despite internal
concerns and misgivings within the City.
The story starts on May 7, 1999. For all but the most eagle-eyed financial
experts, it seemed like another dull Friday in parliament. The Treasury,
however, hoped it would be the perfect moment to bury news that it was
to launch an unprecedented sale of Britain’s gold reserves.
The news was slipped out by Patricia Hewitt, then a junior Treasury minister,
in answer to a written parliamentary question placed by a Labour backbencher.
“Today we are announcing a restructuring of the UK’s reserve
holdings to achieve a better balance in the portfolio by increasing the
proportion held in currency. This will involve a programme of auctions
of gold,” she said.
“The Treasury intends to sell 125 tons of gold, 3% of the total
reserves, during 1999-2000, with the Bank of England conducting five auctions
on the Treasury’s behalf. Auctions will be held every other month
starting in July.”
The answer was later shown to be wholly misleading as the government actually
planned to sell 400 tons before 2002, representing more than half the
Hewitt’s figure of 3% referred to “total reserves” which,
apart from gold, included tens of billions that the government borrows
on the international currency markets, rather than the gold reserves actually
owned outright by Britain.
Sir Peter Tapsell, a Conservative backbencher who campaigned vigorously
against the decision, said in a parliamentary debate in June 1999: “The
written answer given by the economic secretary to the Treasury was extremely
cursory and brief, and contained only a very small part of the story .
. . The way in which the announcement was handled was disgraceful.”
Following the government’s announcement of the sell-off, other leading
economies rushed to the defence of gold as the asset of last resort.
On May 20, Alan Greenspan, then chairman of the US Federal Reserve
and the world’s most respected bank governor, said in response to
Brown’s decision: “Gold still represents the ultimate form
of payment in the world . . . Germany in 1944 could buy materials during
the war only with gold. Fiat money paper [a technical term for legal tender]
in extremis is accepted by nobody. Gold is always accepted.”
The day before, Jean-Claude Trichet, governor of the Bank of France who
later became head of the European Central Bank, said: “I will simply
say that as far as I am aware — and this is not just the position
of the Bank of France and our country but also the position of the Bundesbank,
the Bank of Italy and of the United States, and these are the four main
gold stocks in the world — the position is not to sell gold.”
For centuries gold had maintained its status as the only investment
to retain its value and keep pace with inflation over the long term.
In Victorian times the Bank of England stored gold equivalent to the value
of all banknotes in circulation — the so-called gold standard. This
ensured that money had an intrinsic value and that governments could not
simply print banknotes at will, which could quickly devalue sterling.
However, the gold standard was suspended during the first world war as
the country required huge sums of money to fund the military campaign.
It was finally abandoned in the inter-war period.
But gold remains an important asset for most of the world’s
big central banks. The United States currently holds 8,133 tons
of gold, Germany has 2,422 tons, France has 2,710 tons and Japan 765 tons.
Britain currently has 315 tons. Only a handful of smaller economies, including
Switzerland, Malaysia and Australia, have recently sold off significant
By September 1999, 15 of the European central banks had signed an agreement
limiting the amount of gold that could be sold in future to prevent a
repeat of Brown’s sell-off. The banks said the move had been “destabilising”
to the gold market and new rules were necessary to prevent the problem
occurring in the future.
When Brown became chancellor in 1997, Britain held 715 tons of gold —
an amount that had remained unchanged since the 1970s. “It [selling
gold] was something that was not contemplated. I remember no discussion
of such a move under the previous Conservative administrations,”
said a senior Bank of England official.
Lord Burns, then permanent secretary at the Treasury, also recalls no
significant discussion over the selling of gold during his period heading
the department between 1991 and 1998.
However, Burns left in July 1998 and within months Brown and his aides
had decided to offload more than half the country’s gold reserves
and reinvest the money in dollars, euros and yen.
The driving force behind the decision is still not known, although it
was said at the time that Brown was suspected of attempting to prop up
the newly launched but beleaguered euro.
Sir Eddie George, then governor of the Bank of England, is said by authoritative
sources to have believed at the time that the Treasury’s decision
to sell was “not unreasonable”. But the manner in which the
sale took place is thought to have caused consternation among key Bank
One senior Bank official said: “There was certainly no debate about
the gold price or where it was going. The Bank were not asked to provide
that sort of advice.”
A Treasury official also involved in the process confirmed that no long-term
guidance on the timing had been sought, only specific advice on when the
sales should take place during the calendar year.
“Don’t assume,” he said, “that the Bank of England
were asked the [broad] question, ‘Would you sell gold?’ There
would have been advice on, ‘Is this the best time of the year to
“And that would have been in terms of the micro-structure of the
gold market: when is there strong demand, the Indian wedding season, smaller
issues, but not the cyclical issues — is this point in the decade
the best time to sell?”
A trawl of experts and dealers in the market by The Sunday Times has been
unable to find anyone who was approached by the Treasury to outline the
long-term prospects for gold. The London Bullion Market Association said
it was unaware of any such advice being sought from its members.
It is therefore not known on what expert basis the decision to sell such
a large amount in a relatively short period was taken.
Brown offloaded the gold at a 20-year low in the market — now nicknamed
the “Brown Bottom” by dealers. The 17 auctions achieved prices
for the gold of between $256 and $296 an ounce, with an average of $275.
Since then gold has risen sharply in value and stood yesterday at $685.
This year, some top investment banks have predicted, it could even rise
above the all-time high of $850.
An analysis by the accountants Grant Thornton calculates that the gold
is now worth $5.1 billion more than the price achieved when it was sold.
This figure will grow by another $2.1 billion if the recent forecasts
According to the accountancy firm, the total loss to taxpayers as a result
of Brown’s decision now stands at about £2 billion, as the
euros bought with the proceeds have appreciated in value and thereby slightly
reduced the total loss. The new currency also earns a low rate of interest.
Maurice Fitzpatrick of Grant Thornton said: “With the benefit of
hindsight this was obviously a very poor investment decision for the country.”
The decision to auction the gold rather than sell it quietly on the global
markets also surprised many experts. Other central banks, including those
of Switzerland and Australia, have chosen to use the normal markets to
sell gold and only announce the details of the sales afterwards. By contrast,
from the announcement of the British sell-off in May to the first auction
in July, the gold price dropped by 10%.
The number of traders “shorting” — using financial instruments
to bet on the price of gold falling — went up eightfold in the weeks
preceding the first auction.
“The joke in the market was that Gordon had guaranteed he would
get the worst price,” said the former gold dealer Dominic Hall.
“The world and his grandmother shorted the market. Other central
banks quietly dribbled gold they were selling on the market.” Stokes
added: “The auction process raised hysteria and a negative sentiment
in the market. Had the government sold a small amount quietly on the market
every day, no one would have noticed. The Swiss sold far more without
“It gave the professionals a chance to boot down the market and
then scoop up the gold cheap at the auctions.”
Well placed sources added that the concerns of senior gold dealers over
the auction process — which crippled the London gold market at the
time — were also shared by senior Bank of England officials.
The National Audit Office, which conducted an investigation into the mechanism
of the sale in January 2001, found the auction had been fair and transparent,
as required by the Treasury. Ministers subsequently used its report to
justify their decision, although it specifically states: “This report
does not question the merits of the decision to sell, which is a policy
matter outside the remit of the National Audit Office.”
However, this weekend one of the experts consulted by the National Audit
Office expressed concern over the report. He said he made significant
factual changes to a draft that were not reflected in the final version.
With Brown facing a Commons grilling over the affair, the Treasury is
under pressure to release the official advice so that the public can draw
their own conclusions.
A secure asset
Gold has been prized — and mined — since prehistoric times.
It is the only asset that has maintained its value and kept pace with
inflation, writes Holly Watt.
Britain led the way in establishing a gold standard when Sir Isaac Newton,
as warden of the Royal Mint, linked the value of raw gold to the value
of money in 1717.
The 1844 Bank Charter Act formalised the gold standard, the Bank of England’s
promise that every note could be redeemed for its value in gold. The gold
standard lasted until Britain was forced to abandon it during the first
world war. Churchill returned to the standard in 1925 but it was again
abandoned in 1931.
Since then the Bank of England has maintained significant gold reserves
which can be called upon in a financial emergency.
Gold’s intrinsic value came into question after its price slumped
during the 1980s and 1990s as investors switched into shares and bonds.
Britain decided to sell off its gold in 1999 at the bottom of this 20-year
slump but most countries still see it as a key asset.
Finding the truth
The Sunday Times has been battling the Treasury for 18 months to obtain
documents revealing the advice it received on the sale of gold, writes
Under freedom of information laws, the paper has asked for statistical
information relating to the decision to sell gold; minutes of ministerial
meetings; official correspondence and studies into the aftermath of the
Before the 2005 election the Treasury rushed out comparable information
about the Conservatives’ darkest economic hour, Black Wednesday,
but it took it five months to turn down this request, although it is required
by law to respond within 20 working days.
Among five exemptions it has claimed to block publication is that “such
information relates to the location (past or present) of the UK’s
gold holdings, which, if made known, could increase risks to security”.
This information is on the Bank’s official website.