Potential cost of Gordon Brown's gold sale was £3bn, reveals The Money Programme
As the price of gold reached its peak value in March 2008, former Chancellor Gordon Brown's decision to sell over half of the UK's gold reserves in 1999 has now potentially cost tax payers around £3billion, reveals The Money Programme today on BBC Two at 7.00pm.
The cash invested from the gold sales doubled, but gold turned to be an even better investment as its price has quadrupled over the last ten years.
In March this year gold reached a $1,000 an ounce for the first time in history.
Had the gold been sold at its highest price in March, the UK would have been around £3billion better off – that's almost £50 for every man, woman and child.
Philip Shaw, Chief Economist, Investec, tells the programme: "The Bank of England decided to invest the proceeds of the gold auctions in safe instruments, mainly government bonds from the rest of the European Union, the United States and Japan."
Looking at how Gordon Brown's strategy fared, Shaw continues: "The 17 gold auctions netted the Exchequer around three-and-half billion dollars.
"Now the proceeds were well invested in Government Bonds. The value approximately doubled to around seven billion dollars.
"Had Gordon Brown decided not to sell the gold and sold at the peak earlier this year, the Exchequer would be better off to the tune of around three billion pounds."
In 1999 the Chancellor Gordon Brown told the Bank of England to sell off some of the country's gold and over the next few years it sold 395 tonnes, over half of the UK's reserves at a time when gold value had been falling in price.
After Brown's announcement its value fell to its lowest for 20 years.
Pierre Lassonde, Chairman of Franco Nevada Mining, says: "Well, Gordon Brown came and said 'Well, yep, I'm going to be selling gold' so the market just caved in and the market went down to $250. And it could not have been worse handled at that point in time. And, but did he pick a bad time to sell gold? He picked the right bottom."
Following sales by the UK and other central banks, the Central Bank Gold Agreement was created in 1999, limiting the amount of gold a country could sell in any one year.
Shaw explains: "There are a number of reasons why central banks decided to sell large proportions of their gold reserves.
"I think firstly we're not in a gold exchange standard, therefore, some of the traditional resources for holding gold have disappeared. Also gold is a volatile instrument in terms of its price."
Shaw adds: "The way the central banks make money with gold is simply if the gold price appreciates. There is no dividend on gold as there would be with a stock nor is there a coupon on gold as there would be with a government or a corporate bond."
The Treasury told The Money Programme: "The programme was part of a restructuring of the foreign currency and gold reserves, aimed at achieving at better-balanced portfolio.
"A reduction in risk of approximately 30 per cent was achieved."
The National Audit Office concluded that the Treasury had met its objectives selling in a "transparent and fair manner while achieving value for money".
They also added that: "Other central banks around the world have adopted similar policies."
Notes to Editors
Any use of the above should be credited to The Money Programme: Gold Fever!, 7.00pm, BBC Two, Friday 13 June 2008.