HM Treasury October 2002
"1. EXECUTIVE SUMMARY
1.1 On 7th May 1999 the Government announced a restructuring of the UK’s reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currencies. Since then a total of approximately 395 tonnes of gold has been sold at 17 auctions, run by the Bank of England on the Treasury’s behalf. Revenue from the auctions, totalling around $3.5 billion, has been reinvested in interest-bearing foreign currency assets and retained within the reserves.
1.2 The motivation for the restructuring was one of risk reduction. With nearly 50 per cent of the net foreign currency reserves invested in gold, the exposure to a single asset was too great. Historically the volatility of returns on gold has tended to be high relative to the volatility of returns on the fixed income assets held in the reserves portfolio. However, the returns on gold have also tended to be uncorrelated with those on fixed income assets, and even negatively correlated for some time periods. Thus, gold can play an important role in a minimum risk portfolio. However, it is not unique in this role and other assets, such as inflation index-linked bonds, can be usefully employed to diversify portfolios. Optimal portfolio analysis showed that total risk on the net reserves portfolio could be reduced if the proportion of gold in the portfolio was reduced to around 20%. The first auction took place on 6th July 1999 and the programme concluded with the 17th auction on 5th March 2002.
1.3 Part way through the auction programme the National Audit Office undertook a review of the gold sales programme. The report, published in January 2001, concluded that: “in designing and implementing the sales programme so far the Treasury has met successfully its objective to sell in a transparent and fair manner while achieving value for money. The prices achieved at each of the nine auctions have been competitive and well in line with the prices achieved in similar gold sales by overseas central banks. The Treasury’s agent, the Bank of England, has worked hard to keep the gold market well informed and to secure a technically successful sales programme”.1
1.4 The report formed the basis of the Public Accounts Committee (PAC) hearing which took place in February 2001. The PAC report concluded that: “The Treasury are being rigorous in their approach to achieving a reduction in the riskiness of the portfolio in that they are carrying out the sales within a framework of risk assessment and management”.
1.5 As stated above, the motivation behind the restructuring was to reduce risk. As a result of better diversifying the net reserves, the sales programme has resulted in a one-off and permanent reduction in value-at-risk of around 30 per cent...."
[Mrt: Hmmmmm.... :o)]