Gordon Brown’s decision to sell of half of Britain’s gold reserves 20 years ago at the bottom of the market has been billed as the worst financial decision of all time. Not so, writes my colleague John Rentoul, who argues that it was sensible to diversify our assets. The decision has other supporters too.
It certainly stunned the market, and pushed the price of gold to its lowest for 20 years, as Diane Coyle, then our economics editor, now a professor at Cambridge, wrote at the time. And while there is certainly a straight loss on the deal, about £5bn, that does not necessarily make it a bad deal.
Why? Because of the magic of compound interest. The money that we received for the gold will mostly have gone into short-dated US Treasury securities. These earn interest, unlike gold. I cannot find any official calculation for the interest received on these funds, but remember that we get the interest on the interest. On a very rough and ready tally of the return on three-month US yields, which have bounced around from more than 5 per cent to near zero over the past 20 years, I calculate that we will have earned back in interest an additional 60 per cent of the value at the sale. So we are still well down, but it has not been a total loss.
What threw Gordon Brown, I think, has been the collapse of interest rates over the past 20 years. At the end of the 1990s, the three-month yield on US Treasury securities was around 4 per cent. Had it stayed there, the value would have more than doubled. Remember too that gold had fallen in value during the previous 20 years. So yes, selling gold was a bad financial decision, but at the time it looked a perfectly reasonable one.
Rather than seeing this as a chancellor squandering a national asset, it is more helpful to see it as a clash between two investment principles. One is that you should always have some “safe haven” assets; the other is that you should spread your risk.
Gold is the ultimate safe-haven asset, with a value embedded in human societies for at least 3,000 years. We have the expression “as rich as Croesus”, for he was the first monarch to mint gold coins in around 550BC.
Over the past couple of decades some two-thirds of global savings have been generated in Asia. Many new savers, particularly in India and China but also elsewhere, have experienced considerable financial upheaval during their lifetimes. Understandably they wish to have at least some of their savings in gold. So the relative demand for gold as a store of value has tended to rise. It is transportable, anonymous, and universal in its appeal.
It is not only individuals in Asia that are attracted by gold. Much of the gold sold by the UK has ended up in the central banks of the emerging nations, which have sought to have a larger gold component in their reserves.
The other principle is diversification. That was the rationale behind Gordon Brown’s move, and it is a good one. In Scotland before the financial crash of 2008, many professional families held a high proportion of their savings in bank shares. Banks were safe, paid a decent dividend, and there was also the prospect of a capital gain. Then both the Royal Bank and Bank of Scotland went up the spout. Many families saw their savings wiped out. They thought they were being prudent, but they had failed to diversify.
It is possible, though unlikely, that the price of gold will crash at some stage in the future. So having a high proportion of assets in gold – quite aside from the loss of interest or dividends – makes no sense either. In strategic terms Gordon Brown’s decision was easy to defend. In tactical terms – the timing, announcing in advance how much would be sold, etc – it was dreadful.
One final thought. Going down £5bn does not sound good. But in terms of the national finances of a GDP of more than $2,000bn, it is irrelevant. Gordon Brown made much bigger mistakes than that.
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