Examination of Witnesses (Questions 20-39)|
MONDAY 5 FEBRUARY 2001
20. Has there been any loss due to investing
40 per cent of the gold in what has been until recently an ailing
currency, a falling currency?
(Mr O'Donnell) It is very difficult to say of every
one dollar which bit went where. What we have done is we have
put, as it were, 40 cents of every dollar in dollars, 40 cents
in euros and 20 cents in yen. If you work out the sums that means
overall as of December (as is clear in the Report) that we have
made a profit of $34 million. That number will change and if you
were to do that calculation today you would come up with a different
21. But you cannot tell me how much we have
lost by investing 40 per cent in what has been until recently
a continuously falling currency since its inception?
(Mr O'Donnell) There are two aspects to it. One aspect
is that you sell gold and put it into foreign exchange and there
will be a gain or loss depending on what happens to the value
of the euro and the value of the gold price. There is a second
feature which is that obviously when you invest in euro assets
or dollar assets or yen assets you also get an interest return,
much greater than the return on your gold, so there is an interest
gain as well.
(Dr Mills) On the euro component there has been a
small capital loss overall but a net interest gain.
22. I do not understand that; you will have
to explain that to me.
(Dr Mills) Essentially when we take the proceeds of
a gold auction and invest them in pound assets
and euro assets and yen assets, from that moment on the capital
value can change as the euro changes against the gold price and
against the dollar but also your own assets are achieving an interest
return because we are buying European government bonds or whatever.
Hence, the capital value of the euro can go down or up but we
are still making a positive interest gain that would be bigger
than we would get on gold.
23. Okay. Anyway, in any event, 40 per cent
of these revenues have gone into supporting the euro. Presumably
this has helped the euro? It has not done it any harm, has it?
(Mr O'Donnell) But 40 per cent of it has gone into
dollars as well.
24. That is not the question I asked you. How
much has gone in support of the euro?
(Mr O'Donnell) 40 per cent.
25. Just remind me what that is on the revenue?
(Mr O'Donnell) Of the revenue so far
(Dr Mills) The total revenue is about 225 billion
so 40 per cent of that is
26. 88 or 90.
(Dr Mills) 900 million euros approximately.
27. That has not done the euro any harm at a
time when other people were leaving it and it was going down in
(Mr O'Donnell) In terms of the daily flow into and
out of the euro I would not regard it as significant.
28. You would say it is insignificant?
(Mr O'Donnell) Yes.
29. So this is not an attempt to support the
euro by the back door?
(Mr O'Donnell) No.
Mr Leigh: Thank you. No further questions.
30. Good afternoon, gentlemen. Can you explain
to the non-economist why something which is a gold standard like
gold should be sold to diversify a portfolio rather than, as a
lay person might think, it being something to be held onto and
treasured for some period of time?
(Mr O'Donnell) Let me say first and foremost that
gold will remain an important part of our portfolio. Even though
we are selling quite a lot, we will still retain a large proportion
of gold. It will be about 20 per cent of our net reserves. It
is just that over time we got to a situation where it was around
40 per cent of our net reserves and it is very clear that portfolios
become very risky if they become concentrated in one way or another.
If you can imagine an individual portfolio which consisted of
just one share, that would be incredibly risky. Analysts tend
to recommend that you diversify and hold a wide range of shares.
Similarly, with our portfolio of assets we are managing the risk
by diversifying that portfolio in a way that we think is sensible
and that for us meant when we did the calculations and analysis
of the riskiness of this portfolio that we could reduce the risk
without reducing the return at all by lowering the proportion
31. If you look at table 10 on page 16 it is
apparent that other countries have been selling and others are
proposing to sell considerably more of their reserves than us.
Is that because they hold more gold or that gold is a higher proportion
of their portfolio? Switzerland, the Netherlands, BelgiumSwitzerland
has sold or proposes to sell over 1,200 as compared to our just
over 200 and proposals for another less than 200.
(Mr O'Donnell) The first point to make is that they
are looking at the same analyses. They are all looking at the
riskiness of their portfolio and making decisions in the light
of their preferences for risk return trade-offs and asking what
proportion to hold? I think Switzerland did have a very large
proportion of gold. I do not have the figure to hand.
(Dr Mills) I have got various proportions of percentage
of gross reserves. So, for instance, the Netherlands after its
programme will still have around about a third of its reserves
in gold. Switzerland after its programme will have around 20 per
cent of its gross reserves in gold. The United States, for instance,
holds 57 per cent of its reserves in gold and it
32.Has not sold.
(Dr Mills) It has not sold. It varies dramatically
between countries. Some hold no gold, some hold 40 or 50 per cent
in gold. How much gold they have been holding is partly as a result
of history. For instance, France and America hold a lot for historic
reasons and the history is in part an explanation of the Bretton
Woods system. Other countries hold virtually no gold. It is partly
history and partly preference.
33. Do you think in terms of size of our economy
and economic performance we sit better among those countries that
are close to us in terms of sales policyAustria, Switzerland,
Netherlands, Canadathan perhaps Luxembourg, Malaysia, Czechoslovakia?
(Mr O'Donnell) Put that way probably yes, but I stress
that what has been the driving force for us is looking at these
calculations of riskiness of the portfolio and that is what has
driven us to it. It has not been an attempt to match some other
34. As PAC members we are not used to getting
such glowing reports from the National Audit Office as this one.
Can you answer the questions they pose on page one at number 3
and give us your views on them? Have the sales undertaken so far
achieved good prices? Has the Treasury met the Government's sale
objective? Are there any ways, and I think this is the important
one, in which future sales might be improved?
(Mr O'Donnell) Has it met the value-for-money objective?
Yes, I think so because the best benchmark we have is the Fix
prices, the market prices, and it seems that we have done that.
On the one you said was the most important, are there ways we
can improve things, we built into this programme, because it is
spread over a length of time, the ability to do that, and that
is one of the advantages of spreading it over a number of years,
so we can review whether we made the right decisions in the first
place, and we are perfectly prepared to accept there could be
ways in which we can improve matters. So, in particular, this
review which is going on at the moment will consult the market
about issues like how much information to provide to them post-auction,
and methods of sale, so we will certainly be looking at that.
So far we are reasonably pleased with the way things have gone.
35. Since the Report came out on 12th January,
you have had a further sale I understand.
(Mr O'Donnell) That is right.
36. How did that go?
(Mr O'Donnell) It went very well in the sense, if
you measure it in terms of cover, it was a very successful auction.
The way prices have gone since then has meant, for example, that
calculation I told you about, the 34 million profit to date, if
we were to up-date it, allowing for the fact we have had one more
auction and the evolution of prices, we would now be telling you
a figure of around 100 million dollars profit.
37. The Report on page 35 says there are key
messages for future gold sales, and I think my colleagues have
touched on themflexibility in the timing, transparency
and the advantages and disadvantages of that, and the measuring
of success. What are your observations on those three key messages
which have been identified there?
(Mr O'Donnell) Flexibility: in a sense we have moved
towards being more flexible by only announcing one auction in
advance. We have to trade off there the market's desire for predictability
against the advantages of a certain degree of flexibility, so
we have moved somewhat there. On transparency, we are talking
to the markets about what kind of information they would like
us to produce as a result of the auctions. The problem is we are
in a situation where about 80 per cent of the market wants us
to carry on producing about the same information that we do now,
12 per cent wants us to produce less and 8 per cent wants us to
produce more, so we have to think about how we manage those requirements.
Finally, on the issue of measuring success, one of the good things
about the way we do it is you can see its success by looking at
auction prices versus Fix prices. We have to bear in mind that
if we had sold at the Fix, it would have been a different price,
but it is the best we can do, so that gives us a running measure
which is quite a good measure of whether the auctions are producing
good value for money.
38. You were attacked, and I suppose the Chancellor
and the Treasury were attacked, for the gold sell-off at the time
it was happening, do you consider this Report a vindication of
(Mr O'Donnell) Yes, I do, in the sense that I think
we made clear that we hold transparency, as your Chairman was
saying, as a very important characteristic of the way Government
should operate, and this is a very transparent way of doing things,
and it has shown that you can do things in a transparent way without
losing any value for money because that transparency is valued
by the markets.
39. In terms of the actual prices that you did
achieve, looking back and with hindsight, is there anything you
could have done which might have got greater value for money?
(Mr O'Donnell) When you say "with hindsight",
it is a real issue. It is a bit like, "With hindsight if
I had known who was going to win the Hennessey Gold Cup, would
I have bet on that horse? Yes, of course I would." With hindsight,
if I had known precisely what was going to happen to gold prices,
of course I would have done it differently, but we do not know
that in advance and having observed the process go through I think
the process has worked reasonably well. We are learning all the
time because auctions are relatively new to the gold market at
least, and I think we have more to learn which is why we are conducting
this review at the moment, but so far we are reasonably pleased
with the way it has all gone.
1 Note by Witness: The proceeds of gold auctions
are invested in dollar, euro and yen assets, not pound assets
as stated. Back
Note: The figure should in fact, be 2.25 billion, not
225 billion. Back