Aug 09

Gordon Brown’s Bottom – The Gold Sell Off

Brown’s Bottom – The Gold Sell Off

Reminiscent of the scene from the film “The Italian job” as the coach overhangs on the cliff, imagine Gordon Brown coming in and saying in his scottish accent “Hang on, lads; I’ve got a great idea”.

There are certain things that happen in life in a manner that is more startling than shocking. In essence, there are things that can occur and there is some rationale that can be attached to them. There are certain things that take place though and they just leave a lot to be desired on the person that was sort of the instigator of what took place. A true scenario of what happened between the year 1999 and 2002, what became to be known as “Browns Bottom”. Gordon Brown (the then Chancellor of the Exchequer) caused a gold sell off with 400 tons of gold from the UK at an all-time low price. It was a shocking endeavor, but looking back at it there are certain things that led to that watershed moment of the UK government; it was a clear sense of price manipulation and a bank bail out.

Gold Sell Off – Pre-announcement

The golden rule was and still is common practice even then, to sell a product without informing the market in advance of what you want to do. Gordon Brown broke with convention by making an announcement of the sale of a 400 tonnes of gold in advance of the process. When the market got notice that it was soon to be flooded with gold, the price went down, as would be naturally expected.

The announcement was seemingly done because of the interests of a government that wanted to open and didn’t have anything to hide from the people. As much as the basis of this is arguable, what is clear is that the prior announcement of the sale of gold caused the price of the gold to go down. Any superficial study of the supply and demand concept easily illustrates that.

Gold Sell Off

The Gold Sell Off via auction

For the most times the price of a government sale of that magnitude is not set by public auction, but by the Treasury through the big banks communique with the small banks. By nature, the big banks undertake a research to get the exact price of the supply from the demand that is in the market, and this price fixing always guarantees that the best price for the product is found.

The Treasury however decided to go via the public auction mode and what is brought is the lowest price for gold ever. The morning auction went so terribly wrong as far as price is concerned, and it did not help that the afternoon auction constituted the lowest price ever. It was a hard thing to come to terms with, especially now that with the current price of gold, it is clear that over £9 billion sterling was lost in that sale. What makes it more startling is that the Treasury was sort of hell-bent on getting the lowest price for the gold, and they pulled it off.

The Gold Sell Off & The Bank Bail Out

Several US major banks benefitted from the gold sell off, who found themshelves short on gold enough to call into question its solvency if redemption occurred at the prevailing price.

The Telegraph’s, July 5th, 2012, Thomas Pascoe reported

…Once control of the gold had been passed over, the bank would then immediately sell it for its full market value. The proceeds would be invested in an alternative product which was predicted to generate a better return over the period than gold which was enduring a spell of relative price stability, even decline.

At the end of the allotted period, the bank would sell its investment and use the proceeds to buy back the amount of gold it had originally borrowed. This gold would be returned to the lender. The borrowing bank would trouser the difference between the two prices.

This plan worked brilliantly when gold fell and the other asset – for the bank at the heart of this case, yen-backed securities – rose. When the prices moved the other way, the banks were in trouble.

…Goldman Sachs, which is not understood to have been significantly short on gold itself, is rumoured to have approached the Treasury to explain the situation through its then head of commodities Gavyn Davies, later chairman of the BBC and married to Sue Nye who ran Brown’s private office.

Faced with the prospect of a global collapse in the banking system, the Chancellor took the decision to bail out the banks by dumping Britain’s gold, forcing the price down and allowing the banks to buy back gold at a profit, thus meeting their borrowing obligations.

Gordon Browns 1999 to 2002 Gold Sell Off cost the UK taxpayer £9 billion to rescue failing banks, a theme repeated back in 2008, with another banking bailout, again passing the debt of burden to the people of the UK.  Perhaps this government role should be called “Chancer Of The Exchequer”.