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10.36 am
Mr. Andrew Tyrie (Chichester): I agree that more attention should be given to this subject. The Government should have called a debate, and I regret that they did not. I also agree about the mystique--"Goldfinger" is on television tonight, so it is an apposite day on which to hold this debate, and I have set my video recorder.
The key issue is whether gold can still play a monetary role. It used to play a big monetary role because people did not trust paper money. It played a crucial role in the development of the international traded goods sector in the 19th century. It was very effective, because it was difficult to cheat. It coincided with a period of stable prices in the 19th century. I say coincided because it was largely luck: it was because gross domestic product grew at roughly the speed of the monetary base--the increase in the amount of gold available--and thereby serious deflation was avoided.
That history of success in the 19th century was carried over into the 20th, and gold was used as part of the stabilising function in the Bretton Woods system in 1944--the dollar link. When inflation created by the Vietnam war destroyed Bretton Woods, that should theoretically have led people to rush back to gold. They did a little, but no serious analyst suggested that gold should be brought back as the monetary base. There were more sophisticated arguments for commodity-based standards, which I think had some merit, but virtually no one, even during the crisis created by global inflation, thought that gold was the right way to go.
Since that time, gold has steadily fallen in price. Can gold once again play a role as a reserve currency? I do not think so. It is no longer a good store of value: we have seen that in recent years. I do not think that gold is a suitable vehicle for open-market operations, which are themselves far less relevant in an age of such huge global capital flows. Nor do I think that we will go back to gold as a vehicle for dealing with inflation, if that returns.
Gold is, as the famous phrase goes, a barbarous economic relic. I cannot believe that it makes good economic sense to spend a huge amount of money digging something up, turning it into ingots and then burying it again in vaults. These gold sales are not primarily a monetary issue. I note that the Monetary Policy Committee did not even discuss the matter. The case for the demonetisation of gold is strong.
I cautiously support the sales, but I am sorry that the Government have not moved more carefully. I do not think that there was any need to rush into these sales. We do not know whether the gold price will go down or up. My hon. Friend the Member for Louth and Horncastle (Sir P. Tapsell) said that he thought it was at a low point.
He may be right, and he may be wrong--we do not know--but he could be right, and if he is right we should proceed more cautiously.
Mr. William Cash (Stone):
Will my hon. Friend give way?
Mr. Tyrie:
If my hon. Friend will forgive me, I will not, because I have only two or three minutes in which to finish my speech.
I am a little worried that we will sell too quickly. It is a question not just of the amount, but of the speed. There are good arguments for believing that the gold price may continue to fall. The United States might start selling gold. Has the Treasury a view on whether major countries are now considering gold sales? Is there any suggestion that they might?
I think that gold will be used less in the 21st century as a store of value in Third world countries--Vietnam was mentioned earlier--and that will result in more gold coming on to the market. Improvements in mining techniques will almost certainly increase the amount of gold available. I worked in the European Bank for Reconstruction and Development for a while, and it was found to be profitable to "leach" the piles of slag that had already been used for gold mining, to obtain gold by means of more efficient industrial processes. The supply side points to a weak gold price for some time to come.
Mr. Quentin Davies (Grantham and Stamford):
I congratulate my hon. Friend the Member for Louth and Horncastle (Sir P. Tapsell) on securing this short debate, during which he raised a number of points that it would be remiss of the House not to discuss seriously. He is a distinguished parliamentarian, and brings to the subject a wealth of professional experience as well as the depth of historical knowledge for which he is famed in the House. I never listen to him without learning something that I did not know before, and I certainly was not disappointed on this occasion.
The hon. Member for Kingston and Surbiton (Mr. Davey) also made some sensible points, and we heard a valuable--but sadly, owing to the shortage of time, all too short--contribution from my hon. Friend the Member for Chichester (Mr. Tyrie), who probably knows more about the subject than any other Member except my hon. Friend the Member for Louth and Horncastle.
The Government have left two questions in the minds of parliamentarians and the public. First, why did they decide to sell the gold? We are still no clearer about that, and I hope that we shall be clearer by the end of the debate. Secondly, why have the Government adopted such an astonishing method of conducting the sales?
Because the Government had not given us sufficient explanation, my right hon. Friend the Member for Horsham (Mr. Maude), the shadow Chancellor, wrote to the Chancellor of the Exchequer, but all that he received was a lot of waffle. The reply stated:
Gold has traditionally been held as a reserve because its value is a negative function of the strength of the dollar, a positive function of inflation rates and a negative function of real interest rates. It is possible to construct a hedge against the dollar simply by holding other currencies, but there is no such obvious way of obtaining protection against a resurgence of inflation, a collapse of real interest rates or interest rates becoming negative again, as they have during all our lifetimes, that is better than holding gold. As my hon. Friend the Member for Louth and Horncastle pointed out, gold is a long-term insurance policy against contingencies that we do not foresee in the immediate future, but which could always return. We need to know why the Government have decided that they want to roughly halve that insurance policy. After all, 700 tonnes of gold is not very much for an economy the size of ours.
The Government must think that there is some reason for holding gold in the reserves, or they would have decided to get rid of the entire gold reserve. We need a clear explanation of why they think it prudent to hold a mere 300 tonnes. If they agreed with the arguments advanced by my hon. Friend the Member for Chichester, it would be logical for them to get rid of gold altogether; but they have not, and their actions lack credibility.
Do the Government have formal models for determining their management of the portfolio of the reserves? Is there a formal risk management model? If so, will they place it in the House of Commons Library, so that all of us, including the public, can learn on what the portfolio decisions are based, and why such adjustments are apparently required? After all, the Government are acting in an agency capacity, managing the taxpayer's money.
The Minister must reply to the serious point made by my hon. Friend the Member for Louth and Horncastle. We cannot allow the rumours to grow, because they are extremely dangerous to public confidence. It has been suggested that the market is very short of gold, that the short positions may be a substantial multiple of the total amount of gold currently held by the Bank of England, and that the Bank's real motive is to save the bacon of firms that are running those short positions. If such a suggestion is being made seriously, it must be dealt with authoritatively and definitively, and we want an answer from the Government now.
Apart from the question "Why do it?", the obvious question in the minds of the public is, "Why do it in what is apparently such an incredibly incompetent and foolish fashion?". Someone who is going to sell something does not announce it in advance to the world, and certainly does not try to talk down the price of a commodity in which he is rather long. In normal circumstances, that makes no sense. If these circumstances, or these rules, are abnormal, we had better hear why it is sensible to make a public announcement. On the facts, it is extremely foolish and damaging. As my hon. Friend the Member for Louth and Horncastle said, the markets have reduced the value of the whole gold reserve by 10 per cent. or more since the announcement, and it is clear that the announcement has been one of the major factors in the fall. This is, prima facie, a clear case of incompetence on the part of the new Labour Government.
As if that were not enough, how extraordinary it was to try to talk the International Monetary Fund into agreeing on a programme of gold sales a few weeks before trying to sell our own gold. That was madness. One has to be as incompetent as the Government appear to be to damage the market in advance of such a major sales operation. The Minister and, indeed, her boss the Chancellor, owe the taxpayer an explanation. Why have the taxpayer's assets been squandered and their value gratuitously reduced? No sensible business man or woman would dream of conducting his or her affairs in such a way. Or is it perhaps that the conspiracy theory is right? Has the Government's whole plan been simply to drive down the gold price by whatever means, fair or foul, to save the position of certain figures in the City--the firms that were hinted at by my hon. Friend the Member for Louth and Horncastle--which, apparently, are so short and potentially in such trouble? The Minister has an opportunity to throw light on that. I hope that she will do so.
Given the appalling mistake of having alerted the rest of the world that we were going to sell the gold, why did not the Minister think of alternative ways of proceeding? If she did, why did she not choose them? A private placing is one obvious route that I would have wanted to explore. Some central banks are buying gold. As their balance of payments improve, perhaps China and some of the far east countries will add to their reserves. We have already heard that the Bank of France and the other major gold holders are not selling. Perhaps they might have been prepared to buy a little more, particularly if the alternative was a public auction. They might have said, "We'll help the British out a bit and take some." The discount would almost certainly have been a good deal less than the 10 per cent. and more that has been the effective discount following the manner in which the Government decided to proceed.
"As we have been careful to explain this is a prudent restructuring of the reserves."
This is to do with
"Prudent management of public finances"
to achieve a
"better balance in the portfolio."
Those are evasive answers. We need an answer to the question, why is it more prudent for gold to constitute 20 per cent. of the net and 7 per cent. of the gross reserves, rather than 40 per cent. and 17 per cent., or whatever the current figures are? We have heard no explanation of the factors that determined the Government's course of action, and we badly need one.
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