Select Committee on Treasury Minutes of Evidence



On Friday 7 May 1999 the Treasury announced a restructuring of the UK's reserve holdings to achieve a better balance in the reserves portfolio by increasing the proportion held in foreign currencies. This will involve a programme of auctions of gold from the Exchange Equalisation Account (EEA), which holds the UK's official reserves of foreign currency and gold, with the proceeds from the auctions being invested instead in foreign currency assets and retained in the reserves.

  The Treasury announced it intended to sell 125 tonnes of gold, equivalent to 3 per cent of the total reserves during 1999-2000, with the Bank of England conducting five auctions on the Treasury's behalf. Auctions would be held every month starting in July.

  The announcement was made by way of a written Parliamentary Answer in reply to Question Number 83724 tabled by Ivor Caplin. The answer was laid at 8.30 am on 7 May simultaneous with the issue of Treasury and Bank of England Press Notices.

  Copies of the Parliamentary Answer and the Treasury and Bank of England Press Notices are attached [not printed].


UK Reserves

  Information on HM Treasury's reserves of foreign currency and gold and the Bank of England's foreign currency assets are currently published monthly with a two working day lag in a monthly Treasury Press Notice. More detail on the currency breakdown of these holdings and the Treasury and Bank's foreign currency liabilities is published quarterly with a two month lag in a Press Notice issued by the Treasury and the Bank of England. Copies of the most recent monthly and quarterly press notices (for end June and end-March respectively) are attached [not printed].

  These report UK Government reserves of $35bn and foreign currency liabilities of $22bn. In the press notices gold is valued at a discount to its market value for prudence resulting in £5bn of gold holdings. At the market price the gold would be valued at £6bn resulting in total reserves of £36bn.

  For management purposes the reserves are split into two parts. The first is the borrowed reserves of £22bn of foreign currency assets whose composition matches (hedges) the currency composition of the £22bn of foreign currency liabilities. The second element is the net reserves of gold, IMF Special Drawing Rights and foreign currency assets. Whereas the currency risk from holding the "borrowed" reserves is largely hedged by the foreign currency liabilities, considerable risk is run on holding the net reserves of £14bn (the gross reserves of £36bn less the foreign currency liabilities of £22bn).

  £6bn, or nearly half, of the net reserves of £14bn is held in gold.


  Under publication rules recently agreed between the G10 central banks and subsequently agreed at the IMF, the UK and other G10 countries will be shortly moving to further increase disclosure over their reserves. This will include monthly publication of the split between gold and other elements of countries' reserves.

Exchange Equalisation Account

  The reserves are held in the Exchange Equalisation Account (EEA) which is governed by the EEA Act 1979 (copy attached). The Account is under the control of the Treasury, which has appointed the Bank of England to act as its agent.

Sales by Other Countries

  A number of other countries have sold gold in recent years. These include:

CountryAmount sold (tons) Timing

Belgium707Several sales during 1990s
Netherlands7001992 and 1997
Canada510Regular small scale sale since 1980
Austria334Mainly coin sales
Czech Republic561998
Luxembourg10 (entire

  Source:   Bank of England.


  The 125 tonnes of gold to be sold during financial year 1999-2000 is being sold at five auctions conducted by the Bank of England.

  The auctions are being conducted on the single price format—all successful bidders pay the same price—that of the lowest accepted bid. This should encourage bidders to bid more aggressively, particularly at the early auctions. All members of the London Bullion Market Association and central banks with gold accounts at the Bank of England are eligible to bid. These counterparties typically already have secure communications links with the Bank of England for bidding purposes and have access to well tested payment and settlement systems through which gold will be paid for and delivered.

  The terms and conditions for the auctions are set out in the Information Memorandum issued by the Bank of England.

  The first auction was held on Tuesday, 6th July. The full 25 tonnes of gold on offer was allocated at a price of $261.20 per ounce. This compares to the market price of $261.30 at that morning's London gold "fixing".

  The next auction will be held on Tuesday, 21st September.


  Gold Field Mineral Services (GFMS) annual publication (latest is Gold 1999) is widely regarded as the most authoritative source of information on annual supply and demand on the gold market.

  According to GFMS world gold mining output exceeded 2,500 tonnes in 1998. Despite the falls in price mining supply has been steadily increasing during the 1990s (it was estimated at just over 2,000 tonnes in 1989).

  This compares to proposed UK sales of 125 tonnes.


  The IMF currently holds 103 million ounces (3,200 tonnes) of gold in its reserves.

  The book value of the IMF's gold is $5 billion—a legacy of the old Bretton Woods system of fixed exchange rates by which gold holdings were valued at 35 SDR per ounce. It does not currently earn any return on these holdings. At the market rate holdings worth roughly $27 billion.

  We have called on the IMF to sell up to 10 million ounces of gold. This will be invested in interest-bearing assets, the return on which will be used to meet the IMF's costs of an expanded HIPC (debt relief) initiative.

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Prepared 6 August 1999