Brown Bottom

One of the HM Treasury’s worst financial mistakes ever made, and perhaps one of the least well-timed investment decisions in the history of mankind (we would say that the worst, but it’s really difficult to beat the government-owned German bank KfW Bankengruppe which sent $426 million to Lehman Brothers the day it went bankrupt).

Brown Bottom. If you did not hear about it, it was a period between 1999 and 2002 when Her Majesty’s Treasury sold approximately half of the UK’s gold reserves in a series of auctions. The name comes from Gordon Brown, who was then the UK Chancellor of the Exchequer.

Why the sale of gold reserves was so stupid? Well, just look at the chart below. You do not need a Ph.D. to see that Brown sold the reserves not in the best moment. Gold was at its lowest in 20 years, just before the start of its tremendous bull market.

Chart 1: Gold prices in British pound from May 1990 to November 2018.

gold price at the brown bottom

In other words, Brown sold at the bottom, which is not the smartest move to make money. Let’s calculate: he traded 395 tons of gold at an average price of about $275 per ounce, raising about $3.5 billion. Nice sum of money, agreed. But, wait a moment, today’s price of gold is $1224, more than four times higher! Selling the gold now would raise $15.5 billion, which implies a loss to the UK taxpayers of about $12 billion. OK, the loss would be actually lower, as the prospect of the sales were invested, but the substance is unchanged: the poor timing of Brown cost British taxpayers billions of pounds.

So why did he sell the gold? The official reason was the diversification of the UK reserves away from gold. But why exactly then? Nobody knows. But we can reject the hypothesis that the aim was to raise as many funds as possible. If this was true, Brown would not pre-announce his plans to sell gold, as it caused prices to fall (however, let’s note that the sale of half of Britain’s gold made gold prices drop just 8.5%, which put the ability of governments to suppress the gold prices in the long-run into question).

BBC’s Robert Peston claims that Brown and his advisors just “hated what they perceived as the intrinsic laziness of gold.” However, others argue that the purpose of the gold sale was to support the new currency, as the proceeds were used to buy euro.

Last but not least, some people suggest that Brown sold the gold in order to bail out AIG and the House of Rothschild. These institutions allegedly kept heavy short positions in the precious metals market, looking for a drop in prices to cover their positions and avoid a bankruptcy.

No matter what the reason was, the lesson we should learn (except that the governments are terrible investors) is that we should never forget about gold’s fascinating tendency to retain its value in the long-run. And that the bull markets usually start when almost all, including senior government officials, gave up and are in a bearish mood.