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Sovereign Key Dates
January 11, 2024
The Controversial Gold Sale

Brown's Bottom



Browns bottom is when the Labour Party sold off around half of the UK's gold reserves and it's called ‘Brown’ because Gordon Brown was the chancellor who was responsible for the decision to sell. The sale is famous because it occurred at the bottom of the gold market

The gold price was a multi decade low and just before a 10-year bull market. Many people believe that the UK sold her gold reserves to depress the price of gold because there were some bullion banks that was excessively short and exposed to a rising gold price

The reason why this sale is so controversial is because the UK announced the sale before they started to sell into the market, alerting the whole market that there was going to be a big seller. 40% of the proceeds were invested in euro denominated assets, the euro was quite new at the time and so this is seen as a political move

Whilst many reputable industry experts believe that the UK sold off the gold reserves to deliberately depressed the price of gold to let off some bullion banks off the hook, anyone that has researched the sale may come to a different conclusion

There are many different sources that quote different amounts of tonnes that were sold but the HM Treasury confirms that 395 tonnes of gold was sold with the sale being announced in parliament on the 7th of may 1999

Auction Dates

Timing of the Sale



Gold immediately fell $10 per oz which was quite a lot at the time. The arrow pointing down shows the day that the UK announced the gold sale. The second arrow was when several central banks agreed that they would cap the amount of gold that they would sell within any year and that was a five year agreement which was renewed several times afterwards

Each red dot is a Gold sale auction, the first one took place in early July 1999 right at the bottom of the market but it was only two options that occurred at that time the rest occurred at a higher gold spot price but if you go to the furthest 1 to the right that was in March 2002 and that final auction where the final amount was sold was just at the beginning of a 10-year bull market

Using the UK Treasury’s own guidance for the number of ounces per tonne, the UK sold 395 tonnes which equates to 12.7 million ounces. On the day that the gold price sale was announced gold was trading at $288/oz. The UK Treasury confirmed it received $275/oz price that is a delta or a differential of around $165,000,000, if the UK would have just sold at $288 per oz instead of announcing it and pushing the gold price lower they would have been better off more in the money by the magnitude of $165,000,000

The question that a lot of people want answered is was announcing the intended selling of half the UK's gold reserves just an exercise to drive down the price of gold because of a bullion bank or two being excessively short?

If the UK government believe that some of the banks were so heavily exposed to bad short positions that these banks could become insolvent, there is a risk of contagion in which their insolvency causes distress selling of assets into the open market which begins to pull down other banks and financial institutions. There is some merit into thinking that the UK government would want to avoid this and to rescue some of these banks that was in a really bad position

What we must question is why would the bullion banks be excessively short? A lot of analysts have suggested the banks were excessively short because they want to manipulate the gold price. Perhaps this could be dismissed as a conspiracy, what it more likely is the large short positions were due to the gold carry trade

Short Position Theory

Gold Carry Trade



Conditions in the 1990s was absolutely ripe for the gold carry trade and it's possible that there was bullion banks that had big carry trade positions on in gold and was exposed to a rise in the gold price. A gold carry trade is when an institution such as a bullion bank borrow gold from a central bank in return for an interest payment

They immediately go and sell that gold and invest it in a higher yielding asset. Their profit is the differential between what they are paying in interest to the central bank to borrow that gold at what they're earning on the higher yielding asset

The issue with the gold carry trader is that they've borrowed gold and need to repay it, so once they've borrowed the gold from the central bank, sold it, invested the proceeds into let's say Australian or U.S. Treasury bonds, they have to go back to market and buy the same amount of gold that they owe to the central bank plus interest

If the gold price has risen before they buy it back from the market this eats into their profit. If the gold price spikes they are liable for that amount of gold so they have to buy it no matter what the prices are. They have to buy that gold back because they owe it back to the central bank and that is where they are so exposed to rising gold price

The gold price was falling for years in the 1990s so there was really not much risk of gold prices spiking and because gold was in a bear market the bullion banks were able to buy the borrowed gold back at an even lower price than they sold it at, which increased profits

This carry trade theory is not often spoken of in discussion of the Brown’s bottom gold sale. At the time there was some pressure for the UK to adopt the Euro, many believe that the gold sale and subsequent investment into Euros was a political statement to support the new Euro project

Indeed selling half of Britain’s gold to then invest 40% of the proceeds into Euro denominated assets is a very big political endorsement

A Reuters report said IAG international limited actually left the London bullion market association in 2004. Maybe this is coincidence but this was two-years after the last auction that this big LMBA player left the market. Some analysts speculate that leaving the market was a condition of the government effectively bailing them out by depressing the gold price

An interview of the ex-chancellor Philip Hammond in which he hints that the sale may have been politically motivated. He labours the point that 40% of the sale proceeds went into Euro denominated assets and said that the Prime Minister at the time, Tony Blair, was pro-Euro

"The worst case scenario is that something other than achieving the best price in the market was driving the process, if there was any political agenda or any non-commercial part of the agenda, because that it is the kind of thing that would make people very angry. Remember that this is around the time of the birth of the Euro and 40% of the proceeds of these sales went into Euro denominated assets. The timing of this decision may have been related to the desire to show support for the nascent Euro without taking the politically unpalatable step of joining it. Blair was pro-Euro”

- UK Ex-Chancellor Philip Hammond (2009)

This statement is only telling half of the story. When you get the full picture suddenly things do not seem as much of a conspiracy theory. When you look at the full picture of this gold sale it actually made sense, its just that it happened at a very bad time

The proceeds of each auction were invested in foreign government bonds. It is true that 40% was invested in euro denominated assets but what they don't tell you is 40% was invested in U.S. dollar denominated assets and 20% in Japanese yen assets

The UK’s the main trading partners are the eurozone and the US so Britain effectively sold off a non-yielding asset and invested it into interest bearing assets of our main trading partners. They wanted to reduce gold’s share of our net foreign currency reserves from 50% to just 20%. They believed that there was way too much exposure to a single asset and I think anyone would feel that way if you had your own investment portfolio 50% in one asset you might feel a little bit uncomfortable because every time that asset moves your net worth is really swinging around

This is in line with the optimal portfolio analysis that the UK government conducted at the time which concluded they should reduce the gold position down to 20% of foreign reserves and so the government's own argument for the gold sell was diversification. What they wanted to do was to reduce the amount of holdings in gold and invest that in a foreign currency asset to reduce the overall risk of the portfolio so that the UK tax payer funds was not overexposed to a single asset

The proceeds of each auction were invested in foreign government bonds. It is true that 40% was invested in euro denominated assets but what they don't tell you is 40% was invested in U.S. dollar denominated assets and 20% in Japanese yen assets

The UK’s the main trading partners are the eurozone and the US so Britain effectively sold off a non-yielding asset and invested it into interest bearing assets of our main trading partners. They wanted to reduce gold’s share of our net foreign currency reserves from 50% to just 20%. They believed that there was way too much exposure to a single asset and I think anyone would feel that way if you had your own investment portfolio 50% in one asset you might feel a little bit uncomfortable because every time that asset moves your net worth is really swinging around

This is in line with the optimal portfolio analysis that the UK government conducted at the time which concluded they should reduce the gold position down to 20% of foreign reserves and so the government's own argument for the gold sell was diversification. What they wanted to do was to reduce the amount of holdings in gold and invest that in a foreign currency asset to reduce the overall risk of the portfolio so that the UK tax payer funds was not overexposed to a single asset

Why Was the Market Warned?

Sale Pre-alert



What advocates of the bank bailout theory struggle to look beyond was that this sale was preannounced which seems a very strange thing to do when you are trying to sell in a market such as gold

If the market is alerted to a large seller they are able to front run the sale by selling out of their positions first. You are pretty much assured of a better price than they will get the big seller will add to supply the market which pushes prices down

“The Swiss authorities announced in 1997 that they were planning to sell 1,300 tonnes of Gold. ”

- Declassified UK Government Documents August 1998
“The International Monetary Fund disclosed today that it planned to sell at auction 780,000 ounces of gold approximately every six weeks for the next two years”

- The New York Times 1976
A Trend of Gold Sales

Central Bank Gold Sales 1990s



 
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