City: Passing the buck for that raid on the golden eggs
Source: The Daily Telegraph London
THE Prime Minister told the House of Commons less than the whole truth about the nation's gold. Asked last month why his government was selling it, he answered: "We sold gold on the technical advice of the Bank of England."
So that was all right, then. The House could relax. We were talking about the gold in the Bank's vaults, and the Bank would know best what to do with it. As for all this talk of a secret agenda - something to do with the euro, or with secretive banks running short positions - the conspiracy theorists could get back into their boxes.
Even at the time it sounded fishy. The gold in the vaults is the state's, not the Bank's. It forms part of the official reserves, which are the Treasury's responsibility, with the Bank acting as its agent in the market. If the Treasury suddenly opted to sell half the gold reserves, the Bank would be left to make the best of a bad job. This is evidently what happened. Asked for its advice, the Bank suggested a series of auctions. That would be consistent with the Prime Minister's words, though not with the impression that they gave. The decision to sell was taken at his end of town, the policy was made there, and all that the Treasury will say is that it was a rebalancing act. That, too, can scarcely be the whole story.
As for the notion that Eddie George would recommend this clearance sale, not even the Prime Minister could make it plausible. Mr George has not spent 37 years in the Bank's service to become the Governor who tired of sitting on golden eggs and kicked them out of his nest. It is now plain that he opposed the decision to sell and resisted it, but the call was not his to make.
To the House of Commons Treasury committee, he carefully described it as a sensible portfolio decision. He likened the reserves to a pension fund, managed by the Bank for the government. The trustees might ask for a different spread of investments - less gold, more bonds - in the hope of a better performance.
Trustees can be like that, though even the dimmest pension fund trustees would see a case for buying at the bottom and selling at the top. They would not wait for their investment to reach a 20-year low before announcing a panic sale and driving the price down against themselves. Long-termist trustees would recall that in the previous 20 years, gold was as good an investment as they could have held.
In any case, the reserves are not there as some sort of adjunct to the National Insurance Fund, with a promise that if they do well we shall all get another fourpence a week on our pensions. They are there to underpin our currency and credit. Even the worthiest promises on paper cannot always do that, but gold's worth is not dependent on anyone's promise.
The Governor's opposite numbers have made the point for him. Alan Greenspan told Congress that there should be no sales at Fort Knox. Gold, he said, still represents the ultimate form of payment. Jean- Claude Trichet of the Banque de France put it more dramatically: "One does not sell one's family jewels."
His bank holds gold as a token of monetary sovereignty, as a sign of long-term confidence in the currency, and because gold suits its purposes. Even so, it believes that central banks need to co-operate in managing their gold. Mr George has just become the chairman of the central bankers' club which meets from month to month in Basle. He can expect some sideways looks at its next meeting.
A concern of his at home must be the future of the London market. As the world's biggest market in gold bullion, it contributes to the critical mass of financial services on which the City must depend. For historic and operational reasons, this market has always been close to the Bank of England. Now it knows that there will be a SALE sign at the Bank until further notice. Its customers know that, too, and so do its competitors. Gold no longer comes to this country on the Union-Castle liners, and the market could go anywhere. Mr George, who understands the ways of markets, can work that out for himself. No wonder he winced when he was told to put up the SALE sign.
He must sometimes wonder what Gordon Brown's idea of an independent Bank of England is. It has been given hawks and doves to set interest rates once a month, but it has lost its watching brief over banks, and has been dismissed after three centuries of managing the government's debt. Now the gold in its vaults has to go. Independence has its limits.
We are all left to wonder what prompted these gold sales. To say (as the Treasury does) that we were over-exposed to gold and held too much for our own good is unconvincing. Our gold reserves are not in the first division. France's are four times as big as ours and Germany's are bigger still. Quite soon New Zealand will beat us at gold-holding as well as at cricket.
It may be that a New Labour Chancellor would naturally frown on gold as an archaic store of value, and sell it, just as Labour chancellors frowned and sold in the 1960s when the price was one- seventh of what it is now. He was certainly advised in the Treasury that we should have sold gold twenty years ago. (In these decisions, hindsight always helps.)
Best of all, selling gold would be a policy initiative, at a time when he could use one. He had brought in yet another budget, but his budgets had come to lack novelty value, and after two months the shine had worn off the arithmetic. Other ministers and other departments were making the running. Suggestions, please.
Sir Humphrey Appleby, that archetypal mandarin, had given the textbook solution: "Something must be done. This is something. Therefore we must do it." Selling the gold reserves was undoubtedly something. All that remained was to feed the new policy out as a written answer to a planted question. After all, we don't want MPs asking questions that we haven't planted.
The Prime Minister's experience bears that out. Now, when Parliament returns, he can no longer hope to pass the buck or the gold bar to his technical advisers. He owes the House rather more of the truth.
(Copyright 1999 (c) The Telegraph plc, London)
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