Annex
1. UK SALES—ANNOUNCEMENT
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].
2. BACKGROUND
TO ANNOUNCEMENT
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.
Publication
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:
|
| Country | Amount sold (tons)
| Timing |
|
| Belgium | 707 | Several sales during 1990s
|
| Netherlands | 700 | 1992 and 1997
|
| Canada | 510 | Regular small scale sale since 1980
|
| Austria | 334 | Mainly coin sales
|
| Australia | 167 | 1997
|
| Argentina | 124 | 1997
|
| Czech Republic | 56 | 1998
|
| Portugal | 53 | 1987
|
| Sweden | 32 | 1995
|
| Luxembourg | 10 (entire
reserve)
| 1998 |
|
Source: Bank of England.
3. SALES PROCESS
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.
4. THE WORLD
GOLD MARKET
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.
5. PROPOSED IMF SALES
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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