From The Sunday Times April 15, 2007
Goldfinger Brown’s £2 billion blunder in the bullion market
Chancellor ignored advice on sell-off
Holly Watt and Robert Winnett
GATHERED around a table in one of the Bank of England’s grand meeting rooms, the select group of Britain’s top gold traders could not believe what they were being told.
Gordon Brown had decided to sell off more than half of the country’s centuries-old gold reserves and the chancellor was intending to announce his plan later that day.
It was May 1999 and the gold price had stagnated for much of the decade. The traders present — including senior executives from at least two big investment banks — warned that Brown, who was not at the meeting, could barely have chosen a worse moment.
In the room, just behind the governor’s main office, they cautioned that gold traditionally moved in decades-long cycles and that the price was likely to increase. They added that even if the sale were to go ahead, the timings and amounts should not be announced, as the gold price would plunge.
“The timing of the decision was ludicrous. We told them you are going to push the gold price down before you sell,” said Peter Fava, then head of precious metal dealing at HSBC who was present at the meeting. “We thought it was a disastrous decision; we couldn’t understand it. We brought up a lot of potential problems at the meeting.”
Martin Stokes, former vice-president at JP Morgan, who was also present, said: “I was surprised they had chosen the auction method. It indicated they did not have a real understanding of the gold market.”
According to other sources, however, Bank of England officials told those present they had “little say” about what was going to happen and that they were “doing what they were told”. This was a decision made by Brown and his inner circle, who appeared uninterested in their expert advice.
Ian Plenderleith, the senior Bank executive hosting the meeting, is nevertheless understood to have compiled a note on the meeting for the Treasury. It is one of several key documents that are thought to disclose the warnings ignored by ministers.
Eight years on, the advice appears even more pertinent.
The price of gold has almost trebled and the loss to the taxpayer has been calculated by one leading firm of accountants at more than £2 billion.
The decision to sell 400 tons of gold is seen in City circles as a financial bungle on the scale of the Tories’ “Black Wednesday” that cost the taxpayer £3.3 billion, according to Treasury estimates.
(...)
As Brown inches closer to the premiership — he had his first private meeting with President George W Bush in Washington on Friday — his record as chancellor is coming under increasing scrutiny. For the past 18 months The Sunday Times has been battling the Treasury to release the advice it received on the gold sales under freedom of information laws. Brown’s department has sought — so far successfully — to use a range of legal exemptions to block disclosure.
In its last response to requests by The Sunday Times, the Treasury stated: “We have decided that it is not in the public interest to release further information.”
Inquiries by this newspaper, however, have uncovered new details that Brown’s political opponents say raise fresh questions over his style of leadership and his apparent failure to heed advice from experienced officials. It follows damaging revelations last month when the Treasury was forced to disclose official documents showing how the chancellor ignored similar warnings over his 1997 tax raid on pension funds.
This weekend key insiders involved in the discussions to sell off Britain’s gold revealed how Brown railroaded through the decision despite internal concerns and misgivings within the City.
(...)
On May 20, Alan Greenspan, then chairman of the US Federal Reserve and the world’s most respected bank governor, said in response to Brown’s decision: “Gold still represents the ultimate form of payment in the world . . . Germany in 1944 could buy materials during the war only with gold. Fiat money paper [a technical term for legal tender] in extremis is accepted by nobody. Gold is always accepted.”
The day before, Jean-Claude Trichet, governor of the Bank of France who later became head of the European Central Bank, said: “I will simply say that as far as I am aware — and this is not just the position of the Bank of France and our country but also the position of the Bundesbank, the Bank of Italy and of the United States, and these are the four main gold stocks in the world — the position is not to sell gold.”
(...)
The driving force behind the decision is still not known, although it was said at the time that Brown was suspected of attempting to prop up the newly launched but beleaguered euro.
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A trawl of experts and dealers in the market by The Sunday Times has been unable to find anyone who was approached by the Treasury to outline the long-term prospects for gold. The London Bullion Market Association said it was unaware of any such advice being sought from its members.
It is therefore not known on what expert basis the decision to sell such a large amount in a relatively short period was taken.
Brown offloaded the gold at a 20-year low in the market — now nicknamed the “Brown Bottom” by dealers. The 17 auctions achieved prices for the gold of between $256 and $296 an ounce, with an average of $275. Since then gold has risen sharply in value and stood yesterday at $685. This year, some top investment banks have predicted, it could even rise above the all-time high of $850.
An analysis by the accountants Grant Thornton calculates that the gold is now worth $5.1 billion more than the price achieved when it was sold. This figure will grow by another $2.1 billion if the recent forecasts are accurate.
According to the accountancy firm, the total loss to taxpayers as a result of Brown’s decision now stands at about £2 billion, as the euros bought with the proceeds have appreciated in value and thereby slightly reduced the total loss. The new currency also earns a low rate of interest.
Maurice Fitzpatrick of Grant Thornton said: “With the benefit of hindsight this was obviously a very poor investment decision for the country.”
(...)
However, this weekend one of the experts consulted by the National Audit Office expressed concern over the report. He said he made significant factual changes to a draft that were not reflected in the final version.
With Brown facing a Commons grilling over the affair, the Treasury is under pressure to release the official advice so that the public can draw their own conclusions.
(...)
The Sunday Times has been battling the Treasury for 18 months to obtain documents revealing the advice it received on the sale of gold, writes Holly Watt.
Under freedom of information laws, the paper has asked for statistical information relating to the decision to sell gold; minutes of ministerial meetings; official correspondence and studies into the aftermath of the decision.
Before the 2005 election the Treasury rushed out comparable information about the Conservatives’ darkest economic hour, Black Wednesday, but it took it five months to turn down this request, although it is required by law to respond within 20 working days. 
Among five exemptions it has claimed to block publication is that “such information relates to the location (past or present) of the UK’s gold holdings, which, if made known, could increase risks to security”. This information is on the Bank’s official website.
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