Thursday, 1 November 2007

Golden Brown?

Every time a BBC/NuLab type extols Gordon Brown for delivering "ten years of economic growth", I remember one of his most stupid acts. Every time a BBC/NuLab type tries to blame Black Wednesday on David Cameron by accusing him of being an advisor to Norman Lamont I remember one of Gordon Brown's bigger mistakes.

It is estimated that Black Wednesday cost the UK taxpayer around £3.4 billion, a huge amount - although less than 1% of Government spending. David Cameron was a "political adviser" to Norman Lamont, not an "economic adviser".

Gordon Brown's master stroke of economic genius was announcing in advance that the UK was about to sell half of the Bank of England’s centuries-old gold reserves. Now this is tricky economic theory so bear with me - if you increase the supply of a good, then ceteris paribus (all other things being equal), the price will fall. So guess what happened when Gordon Brown announced the sale of 400 tonnes of gold? The price dropped so he sold the Nation's gold at an average price of US$275 per ounce. Guess what happened afterwards? The price rose. What do you think the price of gold is now? It's around $785 per ounce. So at 35,273.9619 ounces to a tonne, that's a value of the gold now of just over $11 billion ($11,076,024,036.60) as against a sale value of just under $4 billion ($3,880,135,809). That's a loss of almost $7.2 billion ($7,195,888,227.60), which at today's record exchange rate equates to almost £3.5 billion (£3,476,274,506.09), the $2.07:£1 exchange rate hiding much of the loss Gordon made, at $1.5:£1 the loss would be nearer £5 billion (£4,797,258,818.40).

Why did Gordon sell the UK's gold at all? Well it wasn't because nobody wanted gold, China increased its bullion stocks during the late 1990's and early 2000's to 600 tonnes. Many suspected that the exercise was designed to inspire confidence in the then soon to be launched European single currency. This was because some of the proceeds were to be earmarked for the purchase of euros. Roughly a third of the proceeds were invested in euros - which then proceeded to plummet. well done Gordon... You can read more analysis of Gordon's economic masterstroke, including the revelations that the Bank of England and Gordon Brown were advised not to follow this path at the time, here, here and here. Of course if you want a detailed analysis then I strongly recommend you take a look at Burning our money's article on this, worryingly entitled "Brown Bottom".

This article from The Market Oracle might also make interesting reading.

You might assume that other European countries were selling off their gold at the same time as Gordon got rid of the UK's gold reserves at a knock-down price, well not the big economies no. In April this year U.S. gold reserves totalled 8,133 tonnes, the IMF 3,217 tonnes, Germany 2,422 tonnes, France 2,710 tonnes and Japan 765 tonnes. The Bank of England has about 300 tonnes left, see here, thanks Gordon!

1 comment:

Barnacle Bill said...

I think Northern Rock might turn out to be The Bottler's Black Wednesday.
The cack handed promise to depositors in Northern Rock looks like being a Black Hole we will need Dr Stephen Hawking to explain!