Examination of Witnesses (Questions 80-99)
MONDAY 5 FEBRUARY 2001
MR GUS
O'DONNELL, DR
PAUL MILLS
AND MR
IAN PLENDERLEITH
80. Did you do any analysis of whether you thought
those buyers were likely to increase or decrease in number or
in the amount they bought?
(Mr Plenderleith) Perhaps I could pick that up. We
did quite a big review and do do quite a careful forward look
as to what we think the long term prospects for the gold market
are, recognising that we have no special clairvoyance, but we
try to read the surveys of experts and form a judgment.
81. Did you gain the impression at the time
you decided to sell the gold that there was an increasing number
of potential buyers so the price was not going to drop too much?
(Mr Plenderleith) No we had the impression there was
an increasing number of potential sellers. The gold market is
in a very unusual situation in that underlying demand essentially
for jewellery, but also some industrial uses, and some private
hoarding is larger than the annual rate of production from the
mines, but the difference is made up by unloading of excess holdings
by central banks. As Mr O'Donnell has indicated, there have been
increasing indications of other central banks doing our kind of
calculations and wanting to sell and of course their sales would
be likely to hold down any rise in price, indeed depress it over
years ahead.
82. Presumably a short number of years ahead
and after they had sold all they had wanted to then the price
might rise again?
(Mr Plenderleith) For as many as years ahead as we
could see reasonably, five or ten years, so there was no reason
in our view to believe that the gold price was likely to rise
in the foreseeable future and that you could get a better price
by waiting.
83. Did you believe that you were likely to
need that currency for intervention purposes or whatever during
the next five to ten years?
(Mr O'Donnell) That is a very difficult question.
84. If not, it seems clear that we might have
been better to hold on until the other countries had finished
their sales.
(Mr Plenderleith) The risk exposure would have remained
and the Government wished to reduce the risk characteristics.
That was something it wished to do sooner rather than later.
85. Indeed, but you were indicating that you
thought that the chances were over the longer term that some of
these sales might give up, some of the buyers might increase in
number or the amount they bought, and it looked as if in the longer
term there might be therefore some advantage—
(Mr Plenderleith) Not in any reasonable prospect we
could see. It seemed to us likely that sellers from existing holdings
were likely to predominate for some number of years ahead. That
is true of most of the forecasts.
86. Five to ten years?
(Dr Mills) Within that time you could have industrial
discoveries that increased the demand for gold dramatically, or
you could have more discoveries of gold in the ground that could
dramatically reduce the price. Longer term than that I do not
think we are prepared to go.
87. Can I ask a technical question. There are
five players in the Fix. Can they bid either to sell or to buy
on behalf of anybody else or do they have a small number of clients?
(Mr Plenderleith) They are major traders in the gold
market with a wide range of clients and customers so that they
will be trading out of the Fix not only their own positions but
predominantly in fact to order for customers.
88. So could anybody get past the Fix in the
sense that they could go to one of those five and say, "I
want to buy some gold today"?
(Mr Plenderleith) Indirectly, yes, by going to one
of those five.
89. One of the arguments against the Fix seems
to be that it is less open because there are less players in the
market. It seems to me that is only partially true in the sense
that if anybody can get into that Fix indirectly at least—
(Mr Plenderleith) It is only partially true but it
is materially so. Those who are not members of the Fix would need
to go to a Fix member. Some of those would be competing banks
who would not necessarily wish to show their orders to competitors
who are Fix members and of course, typically, Fix members charge
a commission for outsiders whose orders they execute.
90. In terms of the Fix being less transparent,
you say that is because you do not get the total amount of the
sales as you would do in an auction?
(Mr Plenderleith) Yes.
91. Are you talking there just about our sales
or is it less transparent because you do not get the total amount
of sales? In other words, if we said what our sales were in the
Fix would that mean in your view that it was just as fair and
transparent?
(Mr Plenderleith) We can be transparent in our operations
in the Fix by indicating what we have done today. We do not have
that information about the total turnover of the Fix which is
not published.
92. In terms of making it transparent, is us
not saying what we were buying or selling in the Fix just as transparent
as doing it through an auction?
(Mr Plenderleith) It is transparent as to what the
Government would be doing, but it does not give the market an
indication of what that is in proportion to the turnover of the
Fix.
93. We cannot force other people to say what
they are doing. I would have thought, if we say how much we are
going to buy or sell in an auction, that is very similar to saying
how much we are going to buy or sell in the Fix.
(Mr Plenderleith) It would make it a more open process,
yes, we could deliver that degree of transparency.
(Mr O'Donnell) But we still would not get all the
transparency we get from an auction.
94. Why not?
(Mr O'Donnell) Because it is open, it is open to anybody,
they do not have to go through members of the Fix, they do not
pay commission—
95. But they know what is happening. You are
saying how much you are selling and, what is more, it is known
at what price you sold.
(Mr O'Donnell) You would know things like the cover
and the rest of it from an auction.
(Dr Mills) Also the market knows well in advance when
our supply is coming, they would not know in advance when we were
selling through the Fix necessarily, unless we pre-committed absolutely
to say months or weeks in advance, "We are going to sell
X amount in the Fix."
96. Can I turn now to the question of whether
an announcement should have been made or not? When the announcement
was made of the UK's decision, there was about a 10 per cent drop
in price, is that what you expected?
(Mr O'Donnell) It is very difficult to work out what
the price elasticity is to announcements of that kind. We were
not at all clear precisely how much it would fall but we would
certainly expect it to fall somewhat.
97. If the announcement which the European central
banks made and the agreement which led to about a 25 per cent
increase in the price—almost overnight I gather—had
happened before you had made your announcement about your wish
to sell, that would perhaps have given you some indication, would
it, of the sort of price jump you could expect as a result of
an announcement of this sort? Would that have led you to consider
again whether you should make announcements about quite such big
sales?
(Mr O'Donnell) It is difficult to know. What you would
have to know is what the news in any announcement is, ie what
the markets previously expected versus what they then expected
after an announcement had been made. So to work out the news element
of the European central banks' announcement, you would have to
have a view about what they thought those individual central banks
would have been selling versus what they actually said they would
sell over that period. Quite often, it is difficult to come up
with what the markets thought about these issues, so it is not
at all a clear view. Again, the European central banks' announcement
did create a spike in the price but it went off again quite quickly
thereafter.
98. If you look at Diagram 15 on page 20, it
looks as if the second, fourth and sixth auctions all took place
shortly before a price hike—we know why the price hike took
place before the first one—do you have any explanation as
to why that is? It looks slightly suspicious that every time we
sell, that goes into the market, the market if you like absorbs
the fact we have sold a bit more, and there is an immediate price
hike because, one would guess perhaps, people suddenly realise,
"Help, we have not bought any of that UK stuff, we had better
put the price up and buy somewhere else quickly."
(Mr Plenderleith) I do not think, Mr Chairman, those
spikes are related to our auctions. If you look at the other side
of the coin, the third, the fifth and seventh auctions come quite
a way up from the lower levels before the spike. The big spike
after the second auction was indeed the Central Banks' agreement
which you have referred to. The spike after the fourth and the
sixth auctions represents news into the market, in the first case
a reduction in hedging by producers and, in the second case, a
fall in the dollar. In each case we got some of the benefit of
that spike in the following auctions after that. That is the purpose
of staging the thing out, so that hopefully we gain on the swings
even if we lose on the roundabouts occasionally.
99. Mr O'Donnell, I think it was in answer to
something the Chairman asked, said—and I did not write it
down quickly enough to get the exact words—something to
the effect of, if we had put in doubt our agreement on selling
the gold, that would have been dangerous. This was in relation
to whether or not we could have said just before the European
central bank announcement that we were going to put off that particular
auction. It sounded odd to me. I would have thought if you had
said at that moment that you were going to put it off, that would
have said to the market not "Help, help, the price must now
go down", but, "Hey these people know the price is about
to go up", and therefore if anything we ought to be offering
more for gold in the short term because there is some reason to
think it is going to go up shortly.
(Mr O'Donnell) No. My worry was, if we had tried to
play those games and cancelled an auction then, before the agreement—and
we would have had to do this before the agreement was made with
the European central banks—there would have been an issue
about going—
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