By Jonathan Spall
Published: Last updated: June 2 2010 17:22
What connects the following dates? May 7 1999, November 3 2009 and Monday May 17 2010. The answer is gold.
The first of these was the day on which the Bank of England announced that it was selling gold on behalf of HM Treasury. The sales took place via a series of auctions that started in July 1999 before concluding in March 2002 after which some 395 tonnes of the metal had been sold at an average price of a little under $275 per troy ounce.
On the second date, Tuesday November 3 last year, the International Monetary Fund announced that it had sold the Reserve Bank of India 200 tonnes of gold at an average price of $1,045 per ounce. The final date in that series marks the day on which Gordon Brown announced his resignation as prime minister and gold hit a then record high of $1,242 per ounce.
To save anyone scrabbling for a calculator, seven-and-a-half years after the UK concluded its sales, the Indian central bank paid nearly twice as much for half the quantity. And seven months after that the gold price had quintupled from the lowest price achieved at one of the UK’s auctions.
The UK was not alone in its eagerness to sell gold as we approached the millennium. The Reserve Bank of Australia had sold two thirds of its gold reserves in 1997, and in the months leading up to the Bank of England’s announcement, the Swiss National Bank declared that it intended to sell half of its gold reserves – a very material 1,300 tonnes.
Frankly in an age that saw the dotcom boom who could blame them for dispensing with an asset that had been money since the time of King Croesus two and a half thousand years ago. Certainly not the French, Dutch, Belgians, Swedes, Portuguese and Spanish who too were busily selling gold. Indeed, marginalising this precious metal was perhaps a natural action at a time when it was claimed that boom and bust had been banished and we were witnessing the end of the “barbarous relic’s” place in financial systems.
After all, gold had no yield for the private individual and it seemed that inflation had been defeated so why bother with a hedge against it? Indeed in a period of stability the ultimate asset that is beholden to no government or financial institution is little more than a lump of metal. It is this that is the story of gold’s decline from its then peak in 1980 of $850 per ounce and its slump over the next 20 years to a low of $250 an ounce. Over this time there was a sense that economics had been tamed meaning a simple policy adjustment and smooth growth could be maintained.
Its rise after the turn of the millennium, and particularly the recent acceleration in its price shows exactly the opposite: a nagging concern about the health of the global financial system and fear that the only policy imperative is to avoid deflation and kick the problems to some point in the future when there might be a solution.
Why else would the various exchange traded funds (ETFs) for gold have managed to amass some 1,850 tonnes of the metal? Except that investors are looking for reassurance in an asset that is not a call on anyone else and cannot simply be debased or inflated away.
The metal in these funds means that they are now the world’s sixth largest holders of gold – behind the central banks of the US, France and Germany but ahead of China, Japan and of course the United Kingdom.
Impressive. However, while it is not the sole form of gold ownership, it is just 0.05 per cent of global wealth. How many people are intending to put only 5 basis points of their wealth in gold? Not many that I know of – it tends to be a binary decision, either they want gold as a diversifier or they despise it.
There is little middle ground. However, the continued global uncertainty can only increase the attractiveness of gold to a great many institutions from declared buyers, such as the Chinese and Russian central banks, to small investors. With so little of the metal around further long term appreciation looks inevitable as money chases what has always been a scarce resource.
Jonathan Spall is Director, Precious Metals Sales, Commodities, Barclays Capital
Copyright The Financial Times Limited 2010.
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