House of Commons
Wednesday 16 June 1999
[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 recorded history.
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 it.
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 "net reserves", 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 comparable countries.
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 ant icipated 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 Front Bench.
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
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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 silver.
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 thereafter went on to the gold standard. The Federal Reserve Board was originally established to look after the gold.
I mention all that--there is a great deal more to it; many histories of the period have been written in economic terms--to show that what we are discussing is of immense importance and has always been regarded as such. We tend in our debates in this House only to think of more recent events, such as Britain's return to a gold link in 1925, our retreat from it in 1931, the American abandonment of a fixed relationship between gold and the dollar in 1971 and whether, today, Britain should join the single European currency--the arguments over which are very closely related to those I have been describing. It is very significant that, as recently as last Thursday, the British people were, in effect, being asked to vote on matters closely related to the subject of this debate.
Sir Teddy Taylor (Rochford and Southend, East): Does my hon. Friend think that the whole business of the instruction given to the Bank of England to switch from gold largely into euros is simply a pathetic attempt--a device--to give credibility to, and boost the value of, the Euroflop currency?
Sir Peter Tapsell: I said that I thought that that was one of the possibilities. It is certainly among those that commentators have discussed. I have never been an advocate of the conspiracy theory of history, and I tend to think that slightly more complicated issues are involved than that, but I shall return to the issue of the relationship with the euro.
The point of my remarks about the history of the issue and the fact that it has been passionately argued about for centuries, was to show the amazing contrast with the almost furtive way in which the announcement was made on 7 May. One might have expected that the Chancellor of the Exchequer would make the announcement at the Dispatch Box--but far from it. The announcement came on a Friday afternoon, in answer to a planted written question by the hon. Member for Hove (Mr. 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:
"It was a political decision."
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 "throughout the world countries have been selling gold in order to diversify their reserves."--[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 Trichet, 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 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 governors--said: "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 accepted."
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. Ge
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