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Part 2, House of Commons sounds like GATA
11:15p EDT Thursday, June 17, 1999
Dear Friend of GATA and Gold:
Please pardon the length of this dispatch -- it's in
three parts -- but I think you will find it interesting. It is
the better part of a debate yesterday in the British
House of Commons about the Bank of England's plan
to sell a huge part of its gold reserves.
Two members, Sir Peter Tapsell and Quentin Davis,
conducted the debate for the gold side essentially on
GATA's terms, and GATA was in touch with their friends
in recent days. GATA is deeply grateful to them all
on behalf of the gold cause.
There is no telling what will come of this but you will
see that the questions GATA has been raising are now
out in the open in the mother of democratic assemblies.
Secretary, Gold Anti-Trust Action Committee Inc.
* * *
House of Commons Wednesday 16 June 1999
The House met at half-past Nine o'clock. PRAYERS.
Madam Speaker in the Chair.
Gold Sales Motion made, and Question proposed,
That this House do now adjourn. -- Mr. Betts. 9.33 am
Sir Peter Tapsell (Louth and Horncastle): I am glad to
have the opportunity to initiate a debate on the
proposed sale by the Bank of England of more than half
of this country's gold reserves. That decision was
announced by the Treasury on 7 May and has been widely
and critically discussed in the financial press, but
the Government have been strangely reluctant to defend
it or explain it in any detail to the House.
I should start by making it clear that I have no
personal financial interest in the value of gold. I
have never purchased any gold bullion, gold sovereigns
or shares in any gold mining company for myself, and I
have no connection with any mining company or any part
of the jewellery trade. However, I have always taken a
keen academic interest in the economic role of gold,
which has been of importance in every society in
In the 1980s, in my capacity as a stockbroker, I was
required for some years to manage a gold bullion fund,
valued at many hundreds of millions of dollars, for the
previous Sultan of Brunei, Sir Omar Saifuddin. I was
therefore able to add practical knowledge of the gold
bullion market to my academic and political studies of
I regard the decision to sell 415 of the 715 tonnes of
our gold reserves as a reckless act, which goes against
Britain's national interest. The sale of that crucial
element of the United Kingdom's reserve assets will
weaken our scope to operate independently, reduce our
influence in international financial institutions and
diminish the United Kingdom as a world financial power.
I shall briefly set out eight of my main reasons for
opposing the decision. Later in my speech, I shall
expand on some of those and add a few more. First, a
move such as the one announced on 7 May was always
likely to destabilise the gold price, as Britain is a
leading G7 country whose example is likely to influence
other countries and because it was not expected to sell
gold. Market sentiment has become overwhelmingly
negative and the price has collapsed from $287 per fine
ounce immediately before the announcement to $259 at
the fix yesterday--a fall of 10 per cent. That has
reduced the value of our gold reserves in a little over
a month by about $650 million from $6.5 billion to
$5.85 billion at current prices. The Chancellor's
announcement has so far cost this country's taxpayers
over -- 400 million, which is more than the cost to us
of the Kosovo war.
Secondly, the decision reduces our monetary
independence. For a country to hold gold is always and
everywhere seen as an affirmation of independence and
monetary sovereignty. We are told that the decision is
not connected with preparations for joining the euro,
but if we were to join -- the Treasury has said that 40
per cent. of the proceeds from those gold sales will be
invested in the euro -- and if the euro were then to
collapse or we were obliged to leave in the future, the
absence of significant gold reserves would make it much
more difficult to establish the credibility of any new
currency that we had to set up.
Thirdly, the decision smacks of short-termism. In their
foreign reserve policy, Governments and central banks
are supposed to act in the long-term interests of their
country. It is true that on a short-term view, gold has
not performed well purely as an investment in the past
20 years, but that reflects mainly the success, which
is possibly temporary, of central banks in controlling
inflation. No Government can be sure that price
stability will endure for ever.
Fourthly, the decision is a threat to the London gold
market because it reduces the Bank's ability to act as
what is known as a swing lender to the market. Many
market participants believe that after the sales have
been completed, the Bank will not have enough gold to
fulfil its function as a swing lender and so retain the
centre of the world gold market in London.
Fifthly, about 20 per cent. of the proceeds are to be
invested in yen--so the Treasury tells us. Yet, by
lending gold we could earn a better return, as the rate
of interest on gold is higher than that on yen
investments. I have already mentioned that 40 per cent.
is to be invested in euros, yet we hear that the
Netherlands is already taking steps to build up its
foreign reserves to protect the guilder if the euro
were to collapse.
Mr. Robert Sheldon (Ashton-under-Lyne): The hon.
Gentleman said that the interest earned on gold was
greater than that on other foreign assets--
Sir Peter Tapsell: On yen.
Mr. Sheldon: I did not understand that; I am not sure
what the interest on gold is.
Sir Peter Tapsell: The deposit rate in Japan at the
moment is about 0.5 per cent., and the normal interest
rate on gold is 1 per cent., which is double.
Sixthly, the concept of reserve management that lies
behind the decision is deeply flawed. The Treasury has
argued that gold makes up almost half of the unhedged
or quot;net reservesquot;, to quote its press release. That
concept of net reserves is arbitrary, as it all depends
on what liabilities are deducted from gross assets. So
far as I have been able to discover, such a concept has
never been used by any other country; international
gold figures are always quoted in terms of gross
reserves. After the sale of 415 million tonnes of our
gold, as is intended--125 million tonnes straight away
and 290 million tonnes in the medium term--our gold
reserves will be only 7 per cent. of our gross
reserves, which is slightly less than those of Albania.
Seventhly, the history of the past 50 years shows again
and again that United Kingdom Governments have from
time to time been forced to intervene, either to stop
the pound rising too quickly or, more frequently, to
try to slow a fall in the pound. It makes no sense to
throw away a key element of that instrument. No other
major country is doing so. In relation to imports, our
reserves are already far smaller than those of
Eighthly, in the view of many leading bullion dealers,
the method of sale chosen--auctions--is also ill
advised. Whatever the merits of transparency, the UK
taxpayer has certainly lost substantially from the drop
in the price consequent on the announcement and the
resulting fall in the expected proceeds from gold
sales. Each bi-monthly auction of our gold--the first
of which will be held as soon as 6 July--is likely to
worsen that problem.
Mr. Andrew Tyrie (Chichester): Given the great
criticism of the introduction of gilt auctions, which
have turned out to be successful, and given that the
Government have decided to sell the gold, does my hon.
Friend think that there is a better method of selling
it than by auction?
Sir Peter Tapsell: I did say that there was a problem
about transparency. When examined the problem of method
of sale by a committee in Congress the other day, Mr.
Greenspan said that it was very unsatisfactory.
Incidentally, he is completely against selling gold. He
said that, whereas Mr. Buffet could buy silver, and
when the report came out three months later that the
price of silver that he had been buying had risen, he
could sell his silver at a profit, Mr. Greenspan did
not think that major central banks should proceed along
those lines. That is of course the problem and why, no
doubt, the Bank of England has found it necessary to
announce to the world that it will keep selling every
other month. The penalty one pays for that--for
psychological reasons mainly--is a substantial fall in
the gold price.
In giving evidence to the Treasury Select Committee
recently, our governor said that the fall in the price
of gold had been greater than he had anticipated and he
thought it to have been overdone. The authorities
should have foreseen that the psychological impact of
the Bank of England, of all institutions, announcing
that it would take such a course of action, would be
very adverse on prices. That brings me to comment on
the historical background. The argument about gold has
gone on for centuries. The Bank of England was founded
in the reign of King Charles II and, as early as 1717,
it decided to put our reserves into gold. That was
done, interestingly, on the advice of Sir Isaac Newton,
who was born and brought up in Grantham in
Lincolnshire--my home county. It is very appropriate
that my hon. Friend the Member for Grantham and
Stamford (Mr. Davies), whom I congratulate on his
promotion, should today be sitting on the Opposition
Sir Isaac Newton, Lincolnshire's most famous son--the
county has had a famous daughter since, but I shall
pass over that rather more controversial point--
proposed that, in effect, the Bank of England should
put its reserves into gold. The matter was debated at
length in the House of Commons and was approved, only
after great controversy, in December 1717. Thereafter,
many other central banks and other countries argued
about whether they would put their reserves into gold,
silver, a mixture of the two, or some other form.
People have often forgotten that the great economic
debate of the second half of the 19th century all over
the western world was over bimetallism--in effect
whether a country ought to have its reserves in gold or
That debate culminated in the presidential election of
1896--the most ferociously fought and perhaps most
famous of all American presidential elections, which
centred on whether the United States should put its
reserves entirely into gold or a mixture of gold and
silver. At the Democratic convention of 1896 in
Chicago, William Jennings Bryan made his famous two-
hour speech on the subject, in which he used the phrase
about mankind not being crucified on a cross of gold--
one of the greatest speeches ever made. But, William
Jennings Bryan lost the presidential election by
500,000 votes, and William McKinley, the pro-gold
winning candidate, ensured that the United States
shortly Caplin), who is not even in the Chamber today,
and who has not yet had time to establish himself in
the House as a leading authority on international
monetary affairs. It seems extraordinary that it should
have been done in that way.
Moreover, the written answer given by the Economic
Secretary to the Treasury--who I am glad to see in her
place--was extremely cursory and brief, and contained
only a very small part of the story. As is
characteristic of the present Government, the
information was contained in two press releases, each
several pages long, one from the Treasury and one from
the Bank of England, giving a great deal of information
about the Government's intentions--vastly more than was
given in the written answer--and then press conferences
were held at which many questions were answered. The
House of Commons was sidelined again, on this very
important issue. For those reasons, the way in which
the announcement was handled was disgraceful.
The immediate effect has been the loss of 400 million
of our taxpayers' reserves, and so far the only
beneficiaries of this event have been the foreign
finance houses, which have been shorting the gold
market. As I said to my hon. Friend the Member for
Rochford and Southend, East (Sir T. Taylor) in all
friendliness, I am not a subscriber to the conspiracy
theory in any aspect of life, so I shall not go into
detail about the conspiracy theories that are widely
circulating in the City about that shorting of the gold
market, but it is often said that some of those famous
foreign finance houses have shorted gold to a huge
amount--vastly greater than the tonnage of sales
contemplated by the Bank of England--and that it was
therefore vital for them for the gold price to fall
substantially so that they could close their positions
and take huge profits. I do not know whether that is
true, although I think that there is no doubt that
several finance houses have been shorting gold in a
very large amount, so I suspect that the financial
press will pursue that point with vigour in the days
and weeks to come.
Everyone remembers how Mr. Soros precipitated the last
Russian economic collapse by publicly declaring that,
in his view, the rouble was overvalued. Not long after,
he said that his funds had lost $800 million as a
result of that collapse in the Russian market. I do not
know whether our Chancellor has been inspired by Mr.
Soros to follow in that path, but he seems to have
produced a somewhat similar effect.
I have the greatest respect for the Bank of England,
and it is perfectly clear that the Bank did not take
the decision. I doubt whether it even favours it. It
was given an instruction by the Treasury and when, at
the press conference, a Bank of England spokesman was
asked by a journalist whether the Bank thought that
this was a good idea, that spokesman replied:
quot;It was a political decision.quot;
I hope that, when the Economic Secretary replies, she
will--as has not yet been done--give us all the reasons
for this political decision, because the Bank of
England, despite its many merits, has not always been
clever at playing the market, and Governments in
general are not usually very clever at playing markets.
The last time that the Bank of England sold gold in
sizeable quantities was in 1971, at about $40 per fine
ounce. The price of gold then rocketed, reaching a peak
of $850 by 1980. So when the Bank of England last sold
gold, it did so at the worst possible time, and I do
not know whether anyone has ever worked out the extent
to which the British taxpayer was deprived of profits
by that decision.
I strongly suspect that the Bank of England is now
again selling at pretty near the bottom of the bear
market--or what would have been the bottom if it had
not made its announcement. As I said in my personal
declaration of non-interest, I have never owned gold,
but in recent weeks, as the gold price has declined, I
have said jocularly to friends that, if I won the
national lottery, I would put half the proceeds into
gold bullion with the price below $300. I believe that
many people who have followed these matters with
interest were thinking that it was about time that the
finance houses closed their short position. It is
extraordinary, as a matter of market judgment, that the
Treasury and Bank of England should have chosen this
very sensitive moment to step in and deal that damaging
blow to market confidence.
The answer that other countries have given is extremely
interesting. We have not really been told the
Government's reasons for their sale, but on 26 May the
Prime Minister, in answer to a question by my hon.
Friend the Member for Macclesfield (Mr. Winterton),
said that quot;throughout the world countries have been
selling gold in order to diversify their reserves.quot;--
[Official Report, 26 May 1999; Vol. 332, c. 351.]
That is really the only ministerial statement that has
been made, and that was elicited by an omnibus question
by my hon. Friend.
The Prime Minister's answer was most misleading, as I
shall show. Of the more than 100 countries that hold
gold, only five, with relatively small economies, have
sold. No other major economy has sold gold or intends
to sell it. It must be borne in mind that the losses
imposed on the British taxpayer by the Chancellor's
decision have also been suffered by the French, German,
Italian and American taxpayers. I cannot imagine that,
when the Governor of the Bank of England next attends a
cocktail party in Basle for the monthly meeting of the
Bank for International Settlements, he will be the most
popular chap there.
Mr. Christopher Gill (Ludlow): I am grateful to my hon.
Friend for giving way. Several times he has instanced
the potential loss to British taxpayers as a result of
the Bank of England selling its gold reserves. I
understand that point and entirely agree with him.
However, is there not another consideration? Gold and
money are a store of value. If, by selling gold, the
Bank of England put that value into another currency
that seems unlikely to preserve the store of value for
British taxpayers, would that not have a doubly
deleterious effect on taxpayers' funds, first by making
a loss on the transaction, and secondly by investing
the proceeds in a currency where the store of value
will not be retained?
Sir Peter Tapsell: I entirely agree with my hon.
Friend. I shall deal with that point later, as I intend
to make a fairly comprehensive speech about gold. The
point about gold, as my hon. Friend says, is that it is
no one else's liability. As soon as one puts money into
other stores of credit, other factors are at work.
I return to the Prime Minister's claim that so many
other countries were selling gold. No major country is
planning to sell gold, and other countries must be
extremely irritated by the way in which the British
Government have handled the matter. A series of central
bank governors of major countries have issued similar
statements on the subject. For example, on 19 May the
governor of the Bank of France, Mr. Jean-Claude
quot;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.quot;
The chairman of the US Federal Reserve bank, Mr.
Greenspan, speaking to the House banking committee in
Washington the following day, 20 May--there was
obviously co-ordination between the central bank
quot;We should hold our gold. Gold still represents the
ultimate form of payment in the world. Germany in 1944
could buy materials during the war only with gold. Flat
money in extremis is accepted by nobody. Gold is always
Those were the words of Mr. Greenspan, the world's most
admired central bank governor. That takes up exactly
the point made by my hon. Friend the Member for Ludlow
(Mr. Gill). It is therefore not open to Ministers to
say, as the Prime Minister said, that countries of our
standing in the world are all selling gold.
Mr. Edward Davey (Kingston and Surbiton): I am grateful
to the hon. Gentleman for giving way. Will he confirm
that the average annual sales of gold by national
central banks across the world over the past decade has
averaged 300 tonnes a year--almost three times the
amount that the Bank of England proposes to sell?
Sir Peter Tapsell: That is perfectly true, but the
holdings of gold by central banks are only 6 per cent.
lower now than they were 20 years ago. Other central
banks, such as those of Russia and China, have been
buying gold. It is perfectly true that the amount of
gold that the Bank of England is selling is relatively
small, but the psychological impact on the market is
The Bank of England was the bank that set the lead.
Together with Rothschilds and Mocatta, it has always
been at the centre of the world gold market ever since
1717. When the Bank of England says that it is selling
gold, the tonnage that it is selling is less
significant than the psychological impact of that on
the rest of the world.
It is true that five countries--Australia, Canada,
Argentina, Belgium and the Netherlands--have each sold
more than 100 tonnes of gold in recent years, but in no
case have those countries done so to diversify their
reserves or to increase the technical efficiency of
their management. They have all had other reasons.
It would take far too long for me to go into detail
about the position in each country, but briefly,
Australia sold because there was a mineral price slump
in the world at the time and it had an economic crisis.
In any case, Australia has very large quantities of
gold underground, not yet dug up, so it does not have
to worry too much about its gold reserves above ground.
Canada, which also has very large quantities of gold
underground, sold in preparation for joining the North
Atlantic Free Trade Agreement at a time when its
currency was under pressure. Argentina has a currency
board-type arrangement, which is quite different from a
central bank, and is in effect part of the dollar area,
so the considerations about gold that would be
important to other central banks do not apply. Belgium
sold in order to satisfy the debt:GDP ratio criteria in
the Maastricht treaty.
The Netherlands is widely believed to be concerned
about the possibility that the euro may collapse
entirely. It was interesting that the new president of
the European central bank, who is a distinguished
former governor of the Dutch central bank, went so far
as to say publicly the other day that he thought, and
had so advised, that the euro was introduced two years
too early. The Dutch, who have traditionally run a
strong and successful currency since the war, are
extremely concerned about the euro. It is said that
they have been trying to build up foreign reserves
outside the euro, in case the euro collapses.
I shall deal now with the question why central banks
should hold gold. I hope that the Minister will reply
particularly to these points. It is not just a few of
us specialists in the House who are interested. I
assure her that the markets generally are extremely
interested in the subject. I have never received so
many messages from total strangers as I have in recent
days, since the title of the debate appeared on the
Order Paper. The financial press is also very
interested. It is time that the Government explained in
detail the reasons for their policy.
Why do central banks hold gold? First, as I said to my
hon. Friend the Member for Ludlow, because it is no one
else's liability. If one invests in the bonds, paper
and Treasury bills of other countries, one can suddenly
find that one's asset has greatly diminished.
A taxi driver said to me two days after the
Government's announcement, quot;Why are we selling our
gold? I don't want to sell my gold and be given toilet
paper money in return.quot; That is sound economics. The
man in the street may not have read his Keynes, but he
has a good grasp of the realities of economics.
If, as the Bank of England proposes to do, it puts 40
per cent. into dollars, 40 per cent. into euros and20
per cent. into yen as a result of the sale of the gold,
it will be speculating. We have seen a tremendous
collapse in the yen, and the American dollar has gone
up and gone down periodically, so the Bank of England
is, in effect, playing the market.
To return to an earlier intervention from my hon.
Friend the Member for Chichester (Mr. Tyrie), the
argument about transparency also applies to currencies.
When a currency is under pressure it is difficult for a
central bank to start to sell it. It is regarded as
near-treachery. When the British and French currencies
came under serious pressure in 1992, the US Fed and the
Bundesbank were expected to support them, not to sell
them. There has been some controversy over whether the
Germans supported our currency as vigorously in 1992 as
we think they should have done. I think that my noble F
Lord Lamont has views on that subject, which may come
out in his book to be published shortly.
In theory, central banks are supposed to co-operate
with each other so that when a particular currency
comes under pressure, they rally round to support it.
The idea that by diversifying into foreign currencies
the British Government will suddenly have much more
flexibility is an illusion. I very much doubt whether
the Government would like the market to see them
selling their newly bought euros because they thought
that the euro was about to collapse even further. That
would not help the Prime Minister's position in the
centre of Europe.
Mr. Nick St. Aubyn (Guildford): Does my hon. Friend
agree that, in selling our precious gold reserves and
putting the money into the collapsing euro, the
Government will be showing much more support for the
euro than those who belong to it showed support for us
Sir Peter Tapsell: Yes, but one should not conduct
economic policy on a tit-for-tat basis. Incidentally,
we would all be wise not to assume that the euro will
continue to weaken for ever. I can speak with a free
conscience on this matter, as I voted against every
clause of the Maastricht treaty. Indeed, there would
never have been a European central bank if three more
of my colleagues had joined me and others in voting
against the paving motion.
The fact is that the euro now exists and it is just
another currency, as I always predicted it would be.
Currencies go up as well as down. In my view, the
dollar is today over-valued and the euro is under-
valued. The fact that in a few weeks or months the euro
will probably go up against the dollar and the pound
does not strengthen the argument for joining it. Euro-
sceptic that I am, I do not believe that it would be in
the British national interest for the euro to collapse
because that would lead to chaos in Europe and would be
damaging for our export markets.
The second reason why one should hold gold reserves is
because they build public confidence. Market research
carried out last year by one of the world's leading
research companies in several European countries showed
overwhelming support for countries maintaining gold
reserves: 76 per cent. of respondents in France, 72 per
cent. in Germany and 75 per cent. in Italy said that
gold reserves are important in supporting a strong
economy; 84 per cent. in France, 83 per cent. in Italy
and 65 per cent. in Germany agreed that having a strong
gold reserve helps to bolster public confidence on
which economies depend. Similar results--70 per cent.
opposing the sale--were received when the British
public were questioned on the subject in a recent
Another reason why central banks should hold gold is
that, over the very long term, gold maintains its
value. In 1900, the value of gold was almost identical
to its value in 1717. Although its soaring up to $850
in 1980 artificially over-priced the market--it has
been coming down ever since--gold holds its long-term
value, as we have seen throughout history. On 27 May,
the Financial Times pointed out that $35 an ounce,
which was what gold was in 1971 before President Nixon
and Treasury Secretary Connally broke the link between
the dollar and gold, would be equivalent to $281 today.
Thus, despite the fact that gold is at the bottom of a
long bear market, it was still worth more than $35, in
today's terms, when the Government made their
announcement. It has now dropped below that figure.
Mr. Sheldon: It all depends where one takes one's
basis. However, $35 an ounce was the price before the
war, so the hon. Gentleman must take that as his basis
Sir Peter Tapsell: The right hon. Gentleman is a
distinguished former Treasury Minister, but I must
point out that that was not the price before the war.
The price of $35 an ounce was fixed at Bretton Woods in
1944. In 1932, President Roosevelt devalued the dollar
against gold and we devalued, under a Labour
Chancellor, in 1931. However, the $35 that was
officially linked to gold--which put the whole world
not on a gold standard but on a dollar standard between
1945-71--dates from Bretton Woods. I have not argued
that gold has been a particularly good market
investment in recent years, but it has not been as bad
as many people would suppose. Even since 1971, it has
roughly held its value in line with inflation.
My next argument for central banks holding gold is that
a country's reserves should be diversified to minimise
risk. Research shows that gold is an ideal portfolio
diversifier. When I was given the Brunei fund to
manage, I had to go on a crash course because I knew
nothing about gold management. I took much expert
advice and even commissioned, at great expense,
advisers to give me an idea of how much gold should be
in a portfolio. The boffins who deal with those matters
believe that, over a long term, the ideal gold holding
in a major portfolio is about 20 per cent. That is
because gold is an ideal diversifier as its returns are
what is technically known as quot;negatively correlatedquot;,
which means that they operate in a counter-cyclical
manner. When bonds and equities fall in price, gold
tends to go up.
Gold prices are much more volatile than other market
prices. It is not unusual for gold to go up 2 or 3 per
cent., or down 2 or 3 per cent. in a single day. If
Wall street falls by 2 or 3 per cent. in a single day,
it is headline news throughout the world. Thus gold has
a stabilising effect in a long-term portfolio.
Gold is also the asset of last resort. Although it is
needed in good times, it can be vital when times are
difficult. The last sale of gold in France was in 1969
to deal with the financial consequences of the May 1968
uprising. In Portugal gold was last sold following the
1975 revolution. More recently, in 1991 India used its
gold reserves to borrow $1 billion to avoid default.
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