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Two billion here, two billion there

Shocking news from the Sunday Times in London. Gordon Brown is an idiot...

SHOCKING NEWS from the Sunday Times in London. Gordon Brown is an idiot.

   More than that, Tony Blair – the British prime minister – doesn't always speak the truth. Their political party, New Labour, likes to bury bad news. And expert knowledge counts for nothing at Westminster.

   Thus the biggest financial story in the United Kingdom right now – bigger even than its unprecedented bubble in credit – is that Gordon Brown "ignored advice" before selling half the nation's gold at rock-bottom prices in 1999.

   You might wonder why the fuss. Accountants at Grant Thornton reckon that Mr Brown cost taxpayers £2 billion by selling 400 tonnes at the bottom of the market. But so what? Central government gets through that much money every 36 hours.

   Two billion here...two billion there. Pretty soon, you're just funding a war in the desert or paying disability allowance to one-in-four people of working age.

   Still, it's nice to see the Sunday Times reporting a story that's only 7 years old. Now it reveals that a group of top gold analysts and traders – gathered together by the Bank of England – were shocked at the poor timing of the government's decision even before it happened.

   The paper doesn't ask or comment on whether these experts, given advanced warning of the Treasury's advanced warning, may have been in a position to use the insider information to their own advantage. But "the timing of the decision was ludicrous," says Peter Fava, then head of precious metals at HSBC.

   "We told them [the BoE] – you are going to push the price down before you sell it."

   That's just what happened, of course. Gold sank by almost one-tenth on the back of Gordon Brown's decision to announce his sales ahead of time.

   "I was surprised they had chosen the auction method," adds Martin Stokes, a former vice-president at J.P.Morgan. "It indicated they did not have a real understanding of the gold market."

   Clueless or not, however, it didn't matter. The Bank of England had no say in the matter. It only got to advise the government on HOW to sell the gold. The fact of the sale itself had already been decided by the Treasury. And since then, says the Times, the government has defied all calls to release minutes and emails written at the time.

   The paper says the government is now embarrassed by its decision to sell gold. But you wouldn't know it from Gordon Brown's behavior; the guy's not embarrassed by destroying the UK pensions industry, for instance. Why would he be embarrassed by selling gold at the end of the 20th century? Everyone else was doing it, after all.

   "The deterioration of Switzerland’s public finances led to a growing awareness of the opportunity costs of maintaining the existing structure of the SNB’s assets," says Philipp Hildebrand, now vice-chairman of the Swiss National Bank. "The vast gold holdings increasingly gave rise to concern in the context of bearish market sentiments and of gold sales by other central banks. In November 1997, a partial revision of the Swiss National Bank Law increased the flexibility of the SNB’s reserve management activities."

   Further legislative reforms were required to enable the SNB's sale of 1,300 tonnes over eight years. It got them, too; the Swiss people ratified a change in the constitution, and then a new law opened the door of the vault. Out went the Swiss government's gold.

   In short, Gordon Brown might have been an idiot, but he wasn't alone in his idiocy. Even before the Swiss began selling their gold in 1997, in fact, concerted and regular gold sales were being undertaken by the central banks of Argentina, Austria, Australia, Belgium, Canada, Luxembourg, the Czech Republic and India. In Washington, people began to seriously discuss the possibility of gold sales by the International Monetary Fund (IMF). Just this weekend, Japan's finance minister raised the idea again.

   "Japan has told the committee, 'Why not sell gold?'" says Koji Omi. Why not indeed? The IMF would no doubt find willing buyers in the Kremlin, Beijing, perhaps even Johannesburg. The South African government recently acquired gold direct from the country's own gold mining companies. Interfax reported last Thursday that Moscow is thinking of buying gold direct from Russian extraction companies, too.

   And China, reports the Sunday Times, was an eager buyer of Britain's gold at Gordon Brown's giveaway auctions.

   "Several Asian countries including China are named by an insider as having bought the gold 'on the cheap' from the Treasury," says the paper. "The Chinese may have made more than £1 billion from Brown’s botched sell-off."

   Meantime in the spot market, gold for immediate delivery continues to rise against all paper currencies – the fiat money pumped out at will, in just the way that gold can't be, by governments in the United Kingdom, Eurozone, Japan, Australia, South Africa, US, China, Russia...

   Gold has now doubled in price for Sterling and Euro buyers since the Swiss and British governments began selling their gold. Has the market cycle now run its course? Owning the metal – as a defense against monetary inflation, low interest rates, and the destruction of sovereign currency values – might not make you rich. But for as long Gordon Brown remains "short" of gold bullion, owning it can't be too stupid.

   At least, not as stupid as Dear Prudence!

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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