Examination of Witnesses (Questions 100-119)
MONDAY 5 FEBRUARY 2001
MR GUS
O'DONNELL, DR
PAUL MILLS
AND MR
IAN PLENDERLEITH
100. Before the agreement was announced?
(Mr O'Donnell) Yes, before the agreement was announced.—there
would have been an issue about precisely that agreement and how
much our sales were. What we wanted in those negotiations, in
that agreement, was to be clear that we had said how much we would
sell and then everybody else would work round that and we would
be allowed to carry on with our programme. So I do not think it
would be right for us to be opportunistic and try and work on
inside information that there might be an agreement coming up
shortly and exploit that.
101. But we could still, presumably, have told
the other central banks that we were intending to sell that amount,
we were just putting it off for a fortnight or whatever.
(Dr Mills) But we could not have made any public statement
to the market. We would have announced an auction four months
in advance, a week beforehand, or even two days beforehand, all
of a sudden we say, "Sorry, we are not holding it now but
we cannot give a reason for that", the gold market is highly
destabilised as a result. Do not forget—
102. But in the right direction.
(Dr Mills) No, not necessarily, because there are
plenty of traders who are short of gold, so if the price goes
up as a result of our actions they lose money. It is not just
that the gold market likes gold prices going up, producers like
that if they are not hedged, if they are hedged or if traders
have gone short on gold, they want the price to fall to make money.
So you cannot just say, "The gold market would have liked
the price to go up", because only half the gold market would
have done, the other half might have sued us.
103. I am not saying whether they would have
liked it to go up or not, I am saying in practice if it had looked
as if we had some reason for thinking it was worth putting off
a gold sale, the price would have gone up, because people would
have thought to themselves, "Why have they done this? They
must have done this because they are expecting the price to go
up. Is there some news which we do not know about yet which is
coming up?"
(Dr Mills) This is the second auction in a series
spanning potentially three years, we pull the second one opportunistically,
what happens for the rest? Our reputation is damaged and everyone
is more risk-averse going into future auctions, our value for
money is damaged. So essentially we are preserving our reputation
for future sales.
104. Why was the decision taken in 1999 and
not earlier? You pointed to the paragraphs in the report which
indicate that riskiness was thought to be a third higher for the
old mix of assets than it was for the new mix of assets in 1999.
That is a hell of a jump. Did you not make that calculation of
relevant riskiness any earlier than 1999, or did the riskiness
of gold suddenly increase in 1999 for some reason?
(Mr O'Donnell) No, it did not. It would not have moved
around that much. This is an issue where one puts advice to ministers,
they consider it, and if they are willing we then go away and
talk to the Bank about the appropriate timing and all the rest
of it to make sure we do it in an orderly fashion.
105. So are you saying that the Treasury had
not put any such advice to ministers before 1999? You had not
even considered whether it was worth selling gold before then?
(Mr O'Donnell) This is an issue that we have looked
at, yes.
106. But no advice had been given to ministers
that it might be worth selling until suddenly you drop the level
of riskiness by a third? It seems a hell of a jump to wait for.
(Mr O'Donnell) As I say, I do not think there was
any specific jump in riskiness. I think the riskiness was always
there. I am afraid I am only allowed to comment on decisions made
by ministers.
Mr Love
107. Can I follow on from that, it follows on
quite neatly. Did the possible adverse public reaction to sales
have anything to do with ministers' hesitation in selling gold?
They must have been aware of the likely adverse reaction that
we have in our Committee Report. Did that sway ministers in any
way in relation to the timing of this decision?
(Mr O'Donnell) Obviously, when civil servants present
advice to ministers, it is important that they cover the presentational
aspects as well and likely reactions to any announcement, but
in general the timing of this was determined by, once we had a
decision from the Chancellor, us working with the Bank to work
out the best logistics in terms of the way in which we could best
achieve the Government's objectives.
108. I must say that was a classic civil servant
reply. Can I refer you to diagram 7 on page 12 which talks about
the world sales and purchases of gold by central banks. Let me
put to you Mr Rendel's question again, why did we not act until
May 1999 when all the other central banks had been selling gold—I
will not say fairly furiously but let's say there had been substantial
programmes of sales? Why were we so late into the market?
(Mr O'Donnell) I would not accept that we were so
late into the market. There are a number of them who are selling
after us. A number of countries individually have come up with
their decisions about whether to sell or not. There were a number
of examples mentioned earlier—France, the United States—who
have decided not to sell any at all.
109. Let me press you on that. Surely it was
the markets' view since they then went to the central banks and
said, "Hold on, do not sell all this", that the sales
programme had gone a little too far and, unfortunately for the
UK, we had got in before that bar had come down?
(Mr O'Donnell) Markets were worried about uncertainty
about central bank gold sales, that is certainly true, and therefore
after our announcement which was a very transparent one, they
were not at all clear about other central banks which might have
been operating covertly. Therefore, we played a significant part—by
"we" here I am referring to the Bank—in terms
of negotiating this agreement with other European central banks
to provide some certainty to the market. I think that worked very
well.
110. Let me refer you to page 17, figure 11,
it is the London Gold Fix prices, and let me refer you to that
part of that graph through from 1996 to 1999. There had been a
reasonably significant deterioration in the price during that
time. Could it have been that when you were putting advice—I
assume you had been putting advice to Ministers that they ought
to sell gold—it was this deterioration that finally made
them take this decision in May 1999?
(Mr O'Donnell) I do not think so because our analysis,
like I say, at the risk of incurring the Chairman's wrath, was
basically about the riskiness of the portfolio rather than the
value of gold at any particular point in time.
(Dr Mills) Different Ministers, different Chancellors,
different Governments can come to a different decision given the
same advice in that it is a bit like how much insurance do I buy
against certain uncertain outcomes in the world. If I am worried
about a situation where gold will be useful, I will retain it.
If I am less worried about that, I might be prepared to sell some.
You cannot say, a priori, one decision was right and one
was wrong. It is a bit like how much contents insurance should
I have? Should I pay for lots or have none at all? You need to
know my attitudes to risk before that. You cannot say one is right
and one is wrong.
111. I accept that point entirely. Let me press
you a little further on that paragraph. The gold price fell from
$850 down to round about $400 between 1980 and 1984. Surely that
was a very significant deterioration in asset value of your overall
reserves and there should have been a point between 1984 and 1999
when the price varied somewhat but not hugely where advice should
have been given that to hold 50 per cent of your net assets in
gold may be too much?
(Mr O'Donnell) There were people during that period
saying that since gold had been at $800 it will move back to $800
and now when it has fallen $400 is precisely not the time to be
selling. So certainly I think with the modern developments in
risk analysis we are able to say now that a portfolio with that
high a proportion of gold in it, and given the volatility there
has been in the gold price over that period, which is a key part
of that analysis, one is able to say that one wants to reduce
the proportion of it in one's portfolio.
112. In paragraph 2.7, page 16 it says there
that "gold prices are likely to remain below $300 per ounce
... for the foreseeable future". Are you confident that that
is the case?
(Mr O'Donnell) That is a particular private sector
body, Gold Fields Mineral Services. I do not attempt to forecast
gold prices.
113. But it must be your view, since you are
talking about the risk of the different parts of your portfolio,
that the gold price is not going to change significantly in proportion
to the other types of assets that you hold?
(Mr O'Donnell) My view is taken on the volatilities
rather than the expected returns so it is to do with the riskiness
of the portfolio.
114. The reason I ask that is that most of my
colleagues round the table here seem to be expressing considerable
concern about holding assets in euros or holding assets in yen.
I think if we should have some concern it is perhaps holding assets
in the dollar. The Treasury must have a view about the likely
future projections of the American economy and are those views
about the likely future projection of the American economy factored
into your decisions as to what level of assets to hold in different
forms?
(Mr O'Donnell) We certainly do take views about prospects
for the US economy. Indeed I was asked about them recently by
the Treasury Select Committee so I am on record giving at some
length Treasury views about the US economy. We do take these views
into account, but I stress we do not try to manage the foreign
exchange reserves as one might manage a pension fund account.
We do not do short-term switches between dollars and euros because
of a differing view about the relative prospects of the two economies.
We take a long-term view—40:40:20—and at times that
will work well, at times not so well but over the medium term
we think it is a reasonable balance.
115. If you assume that the gold price fell
to $400 in 1984 and then for 15 years you held firm, so that was
a long-term view and we waited 15 years before we sold gold, are
we to assume if anything should happen to the world economy and
the gold price starts to appreciate again that you will wait another
15 years before you buy gold back again? Is that not too long
a term view? I understand why you do not buy and sell on a monthly
basis but is that not too long term a view and are you at the
end of the day reducing the effectiveness of reserve assets?
(Mr O'Donnell) We try to balance taking a long-term
view, yes, not making big strategic errors of that kind, but that
is a balance we have to take.
116. It says in the Report that you have three
policy criteria in carrying out these sales, transparency, fairness
and value for money. I would assume that you accept the comments
in the Report that there is to some extent a tension between them.
How do you view them? Are they equal to each other or is one more
important than the other?
(Mr O'Donnell) I am not sure we take the tension very
far. The way we have done it with auctions gives us good value
for money but it is a transparent method. I do not think transparency
necessarily costs you money or fairness. By opening up our sales
to the maximum possible number of buyers we can achieve best value
for money.
117. There are a lot of people who would say,
for example, that markets are anything but fair and yet you put
fairness as a top criterion. Why?
(Mr O'Donnell) Our particular term of fairness is
that they should be open to all on the same terms, we should not
provide insider information to certain groups. That is what we
would regard as fair. One could have interesting questions about
whether a market allocation of resources is fair when one defines
fair in different ways. If you define it the way I have what we
have tried to do is to make market operations fair in the sense
of open to all on the same terms.
118. I was interested to hear you comment earlier
that 12 per cent of the market wanted less information than more
information and I would assume that the restriction of information
that they were suggesting could only be because they believe it
would give them some form of advantage in the market-place. That
is anything but fair.
(Mr O'Donnell) It is to do with strategic bidding
and the like as to precisely how much information one provides
about bids.
(Dr Mills) Those who wanted less information might
have been referring to the cover statistic for the first two auctions
which some in the market seemed to think had been inflated by
some strategic bidding and therefore was misrepresentative. We
are fairly clear we have roughly got the right amount of information
that we provide, and this is the same amount of information which
is provided at gilt auctions held on this basis and US Government
bond auctions, so what we provide is not strange in any way.
(Mr O'Donnell) The point being, it would not be helping
fairness if one put out extra information if that information
was itself misleading.
119. Can I ask whether you took a view about
the cost differentials between the alternative selling opportunities
which were available that you would place on, for example, transparency
which I think is your major other criteria? What differential
would there need to have been between the method you use and the
price Fix before you decided to look again at whether transparency
was an appropriate criteria to use?
(Mr O'Donnell) If we had found significant differences
between the outcomes—if we had found a statistically significant
difference between the Fix outcome and auctions—then we
would have certainly had an a priori case to answer as
to whether that statistically significant amount was a price worth
paying for greater transparency. But, as I say, since the differences
are statistically insignificant, we have not had to face that
issue.
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