How the Treasury lost a golden opportunity

The National Audit Office is investigating the Bank of England's gold auctions amid allegations that the process has already lost the Treasury as much as £100m.

The National Audit Office is investigating the Bank of England's gold auctions amid allegations that the process has already lost the Treasury as much as £100m.

On behalf of the Treasury, the Bank has so far conducted eight auctions, each of 25 tonnes, in a process designed to reduce the nation's gold reserves from 715 tonnes to 300 tonnes. Critics argue that the decision to dispose of the precious metal in transparent auctions has caused the gold price to fall in advance of the auctions, thereby reducing the revenue generated. The worst example of the trend came in the second auction in September 1999, when 25 tonnes were sold for $255.75 an ounce.

When details of the auction were announced a week before, the gold price was $290, and 10 days afterwards it had rallied to $330. One analyst estimated that the method of selling, which was chosen by the Treasury, had cost the nation $60m in this auction alone. The NAO's investigation has been sparked by concern that the process has failed to maximise the Treasury's income.

Other European countries have chosen more profitable means of disposal. Most, like Switzerland, are selling small chunks each day in a manner designed to minimise the impact on the gold price. The Bank of International Settlements is co-ordinating such regular sales on behalf of a number of central banks.

Andy Smith, commodities analyst at Mitsui, believes that the Treasury should have used the more subtle selling techniques involving derivatives that are used by the world's major mining companies.

"As a taxpayer, I'd want the Bank to use all the instruments available," he said. "I don't see why the central bank should be any less professional."

He said that gold traders were using the announcement of future Bank of England sales to set up lucrative short positions which they were able to square up at the subsequent auctions. The next auction is at the beginning of November.

Kamal Naqvi, metals analyst at Macquarie Bank, said: "There is no justification for holding long positions going into these auctions. People look at them as a chance to cover short positions so the Bank of England is getting lower prices than if it were selling quickly and regularly."

A spokesman for the Treasury said: "We wanted the process to be as transparent as possible and to provide as much access as possible."

There is no indication that the Treasury will revise its method ahead of the NAO's report, which is due at the end of the year. The Bank of England declined to comment.