Tuesday, July 10, 2012

"Revealed: Why Gordon Brown sold Britain's gold at a knock-down price"

At the time, market participants were completely baffled by the Exchequer's actions.
This is the first  I've seen of even a purported explanation. There sure as hell hasn't been any from Gordon Brown.
From the Telegraph:

Britain's gold reserves were sold at a ludicrously low price
A great deal of Gordon Brown’s economic strategy would strike a sane man as troubling. Not a great deal was mysterious. The orgy of consumption spending, frequent extensions of the cycle over which he would “borrow to invest”, proclamations of the “end of boom and bust”: these are part of the armoury of modern politicians, of all political hues.

One decision stands out as downright bizarre, however: the sale of the majority of Britain’s gold reserves for prices between $256 and $296 an ounce, only to watch it soar so far as $1,615 per ounce today.
When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things.

First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory.

Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply.

The auction system again frequently achieved a lower price than the equivalent fix price. The first auction saw an auction price of $10c less per ounce than was achieved at the morning fix. It also acted to depress the price of the afternoon fix which fell by nearly $4.

It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was....MORE
HT: ZeroHedge

We've posted on Chancellor Brown's odd behavior a few times, starting with 2008's "Gold trades at $850 per Ounce. And: How We Got There the First Time":
For a couple decades (since watching the XMI action on Oct. 20, 1987) I mentally run market movements through a thought experiment.*
(Gedankenexperiment, coined by Hans Christian Ørsted)

I call the thought experiment The Grassy Knoll Theory of Investing.
This name tends to insure that I am left alone at parties.
The GKTI has as its postulate: "There is a THEY" and its corollary "They know".

Except sometimes they don't.
(or do they?)

I use it to explain the inexplicable.
First I adjust my tin-foil hat.
Then I pick up the FT or the WSJ.
And think.

For example, why on earth was the Bank of England selling the British people's gold reserves at announced (!) auctions between July 1999 and March 2002 at a weighted average price of $274.92? Here's HM Treasury's explanation.
(page 27 of a 36 page PDF)

In most cases the GKTI is about as useful as Riemannian geometry.
You don't need Riemann to walk around the block, but knowledge of Great Circles sure helps to get you to your destination before the jet fuel runs out.

Which perambulation reminds me: The pedestrian conspiracy theories have the Queen of England mixing it up with the Rothschilds in a New World Order/Bilderberger/CFR/Trilateral shindig to rule the world.

Selling the nation's gold at the bottom of the market (the lowest p.m. price fix of the last 27+ years was $252.80, if memory serves) and just prior to a tripling of the price was either extraordinarily stupid or treason. Either way, someone should have been executed.
There have been no reports of shots at the Tower of London, though.

Here's the story that triggered this ramble: Gold, 1980.
And twice in 2010: 
This is How a Competent Central Bank Does it: Swiss National Bank Seen Selling Euros (EUR/CHF) 
A Trade Against the Swiss National Bank (CHF/YEN)