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House of Commons

Wednesday 16 June 1999

The House met at half-past Nine o'clock


[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.

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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

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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 on 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 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 to think only 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 about 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.

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