Chancellor's losses hit $6.6bn as gold touches record high

Labour's sale of half the Bank of England's reserves to invest in euro and yen was 'impatient' and 'badly timed'

Gold hit record highs on Friday, raising the cost of Gordon Brown's decision to sell half of the UK's reserves to more than $6.5bn (£3.4bn).

Between 1999 and 2002 the Chancellor made the Treasury sell 395 tons of gold - around 50 per cent of the reserves held by the Bank of England - taking in $3.5bn. This was re-invested in foreign currencies including the euro and the yen.

During the sale, the move was criticised for its bad timing and its potentially political motivation, allegedly supporting the weak single currency in its difficult early days.

At the time, however, Mr Brown defended the move as diversifying the UK's reserves, and he pressed for the International Monetary Fund to follow suit. He was criticised by the then head of the World Gold Council, Haruko Fukuda, who said: "Gold has been held as a reserve for thousands of years."

The rise in the value of gold since then has led to further questions over the strategy and its execution.

On Friday the gold price was $725.75 in London, a record high, having gone up more than 60 per cent in the past year. Its rise has come along with a general commodities boom and has been pushed by demand from India.

At this price, the 395 tons of gold would be worth $10.1bn - nearly three times the amount the Chancellor banked when he sold it.

"The Treasury's impatience over timing has been very costly," said Vince Cable, the Liberal Democrats' Treasury spokesman.

The $6.6bn difference between today's price and the amount the Treasury received does not represent pure losses for the British taxpayer. Much of the money was invested in euros and the yen. The euro has risen over 10 per cent against sterling in the period, and the yen by nearly 25 per cent.

However, even if the Treasury had invested in both currencies at the right time, the losses from the gold sell-off would be approaching $6bn. This is the equivalent of at least 1p off income tax in one year, and is more than four times the £750m deficit in the National Health Service budget that is leading to wide-scale cuts at hospitals up and down the country.

The Treasury is adamant that the sell-off was the right thing to do. "Anyone can use hindsight to say there was a better time to sell, but no one argues that it was the wrong thing to do," said a source close to the Chancellor.