Friday, November 25, 2011

HM Treasury - Review of the sale of part of the UK gold reserves

HM Treasury October 2002

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)]



  1. Mortymer, take a look again at the famous FOA on May 8, 1999 (Msg ID:5772):

    Here is the Telegraph in March 2010:

    And a Crazy Keiser:



  2. VTC: FOA post just fits in the discussion, looks more clear when I read it again now. Thank you.

    The interesting part about MK video is IMO: "...40% of profits went to euro denominated assets..."

  3. FOA (5/8/99; 20:16:12MDT - Msg ID:5772)
    Well, by now everyone must be aware of the "open management" of the gold price. "Another" had been bringing this picture to light long ago. In puzzle form, he offered ideas, Thoughts and directions for consideration. Only a short time ago most analysts completely wrote off such
    "thinking" as being absolutely "on the fringe of reality"! Today, the "absolute fact" is that gold is used and managed as a "world currency" of major importance. After the BOE announcement on Friday, currency traders are grasping the concept that gold is, as never before "at the center of

    Many different factions are maneuvering gold these days, and each has their own agenda. The IMF / dollar faction, many years ago, went along with Europe in lowering the gold price in dollar terms. It made the dollar look stable and enforced it's continued use as the "currency of settlement" for strategic commodities. Any country running a balance of trade surplus of dollars, was free to buy gold at a stable to lower price, and partially replace the paper dollar reserves. Because the dollar is the "world reserve currency" many countries ran dollar surpluses with trading partners outside of the US. In this light we can see how the integrity of the dollar was expanded, even in countries of nonnative dollar origin!

    Not only was physical gold purchased, but paper gold with distant CB backing was also accepted. Ever wonder how all of this gold was placed? You see, over the last many years, there has been a quiet boom going on in gold ownership. The sheer number of world gold buyers has
    more than doubled, along with the amount of gold owned! The problem is that the amount of physical gold in existence has not doubled, only the warehouse receipts.

    Most of it never, ever left the vaults, as the true placement was done in receipt form. Yes, slowly, over the years, even major private bullion holders offered up their physical for "convoluted, future delivered, leased and released gold". Much of what is now held is little more
    than a form of gold options for "future deposit". Not unlike the "cash dollar that is supposed to be in your bank", but really isn't? As the bank only holds your deposit as a "credit" to your account, so is much of the world traded gold "only a credit of account"!

  4. When Central Banks (mostly the European, at first) began to lease / lend gold, they were beginning what was to become "the master plan". The creation of a broad, liquid paper gold market that would ulltementally undermine the dollar, in time. As I said above, initially it was offered as an "appeasement" for continued dollar use. However, even the IMF / dollar faction never expected the successful creation of another competing reserve currency, the Euro! Right up
    to it's offering, the political money was on the side of a complete failure, 100% with ten to one odds.

    Not only did they lose, the Euro even accepted a percentage of gold as Euro reserves. If that wasn't enough, the ECB also instituted a policy of "marking to the market" it's gold reserves and effectively blocking any new sales or leases. These actions, as subtle and misunderstood as they
    were have had the effect of officially making gold money again. Yes, this new broadly traded paper gold market, standing side by side with the physical market has become a world currency.

    The problem this creates for the IMF / dollar is that most, if not all of this new gold market is settled in dollars! Dollars that broke a contract with the world in 1971 and went off the "gold exchange standard" at $41 to the ounce. The same dollar reserve currency that is not supported when the gold price rises. If the ECB does nothing but stand firm by not allowing physical out of it's vaults, the dollar will be trapped by gold. The US treasury cannot use gold as a backing reserve as the ECB does, because the BIS would claim it at $41 to settle trade imbalances. They
    have that authority and as such it leaves the US the only option of outright gold sales. However, with the dollar as "the" reserve currency, we can expect many nations to bid "aggressively" for any US gold. China, among others comes to mind! That is what America found when they tried to auction it's gold in 1978. The Euro carries no such baggage.

    This all leaves us in the present political situation, where the IMF entity, that was formed to replace the gold standard, is now trying to back the present paper gold with physical to prevent a run on the dollar. It is a futile effort as the ECB / BIS have grown the gold market into massive proportions by encouraging the many year expansion of holders through paper securities. All denominated, ultimately, in dollars. We will see $10,000 gold, count on it! It's the only way this can be resolved. That same figure will create massive backing for the Euro and hasten it's journey into world reserve currency status. Expect most of the ECB liability for gold to be easily converted into Euros at the dollars expense.

    Now, the BOE action clearly shows the split between them and the IMF / Dollar faction. They have given up on freeing up IMF gold to support the dollar and are actively trying to help their LBMA. England will be forced into the EURO as they abandon ship. I expect an explosion in open interest on Comex as major players try to hedge themselves against short gold. The US now has no choice but to encourage gold to rise and use that action as a political ploy. They will no doubt try to gain much mileage out of the fact that the treasury has 8,000 tonnes of gold for dollar backing or outright sales. It will be a political discussion, only. As the gold market becomes more dynamic and gains media attention, many congressional investigations will target the short funds. After all, with gold killing the dollar, something must be done.

    I have some other commits and replies to other posts. Be back in a minute.