Gold and Gordon Brown
Gold closed yesterday at just over $981 per ounce and seems set to continue its remarkable upward path towards the magic $1,000 number.
In nominal terms, it reaches new highs on a daily basis – though adjusting for inflation it remains significantly below where it was in the inflationary world of almost 40 years ago (its nominal high back then was $850, which was briefly touched in January 1980).
What’s going on is that investors are again seeking out gold as a putatively inflation-proof store of value in uncertain times.
It looks oh-so solid and reliable compared with all those poisonous securities manufactured by brainy bankers out of defaulting US sub-prime loans.
But it is the Federal Reserve’s current mission to slash interest rates that is giving the big push to the gold price right now.
Many investors fear that the Fed has – at least for now – abandoned any notion of keeping a lid on inflation, in its apparently desperate attempt to revive the ailing US economy (which was described yesterday by the great Buffett as in recession “by any common sense definition”).
So there has been a flight out of the dollar, which has been tumbling in value, and into the shiny yellow stuff.
Which brings me to one of the least well-timed investment decisions of this or any age, Gordon Brown’s sale of 395 tonnes of our gold in 17 auctions between July 1999 and March 2002.
The average price achieved in those disposals was $275.6. Gold has since risen in value by 256% – a rate of return which would bring pride to even the cockiest of hedge-fund superstars.
Or to put it another way, 395 tonnes of gold from our official reserves that was sold for $3.5bn would now be worth $12.5bn.
So we appear to have lost out on $9bn of gains – or about $300 per taxpayer.
However, that’s a slightly simplistic view of the scale of our loss.
The $3.5bn of revenue raised in the sales was invested in interest-bearing assets denominated in dollars, euros and yen to the extent of 40%, 40% and 20% respectively.
So to calculate the true net loss to the taxpayer, I would have to adjust for the yield on these assets and movements in the value of those currencies. And I don’t have enough information on precisely what was bought and when to make that calculation.
It is probable, however, that the effective net loss on Gordon Brown’s great gold sale would be a bit less than $9bn – but it would still be a very significant loss.
So why did Gordon Brown as chancellor dispose of all that gold? Well, my recollection of conversations with him and his advisers at the time is that they hated what they perceived as the intrinsic laziness of gold. It simply sat in the vaults gleaming but earning no interest.
They wanted assets that appeared to earn their keep, by generating interest payments.
They also hoped and believed that rampant global inflation was a thing of the past, and that the days of gold’s soaraway success would never recur.
To be fair to them, they weren’t alone in reducing their gold holdings. The Swiss, the Belgians and the Dutch also sold very significant amounts.
Also, the gold loss is spilt milk – and, as any great investor will tell you, it’s fatuous to weep over it.
But the stewards of our wealth would surely try to learn from their mistakes. And, in this case, Gordon Brown’s error was probably to place too low a premium on gold’s bothersome habit of retaining its intrinsic value over the very long term.