Why Brown was right - the state should not hold gold!

Tim Focas reflects on the 20th anniversary of Gordon Brown selling off half of the nation's gold reserves.

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Tim Focas
On 12 May 2019 12:41

Where did that time go? It is hard to believe that it is two decades on from Gordon Brown flogging off almost 400 tonnes of the nation’s gold. The mainstream economic view at the time was that the then Chancellor sold way too cheaply. Brown he made a pre-announcement to the market about his intentions to sell. An unusual decision at the time, which subsequently made potential buyers drive down the price.

However, while there is no doubt he could have sold at a better price, for the vast majority of governments across established economies, the truth is that there is no real point to holding gold.

The purpose of foreign exchange reserves is not for the state to manage wealth on behalf of the country. People should do this for themselves. UK reserves should only really be used to underpin monetary policy, and to halt any possible crisis such as a significant run on the pound, not as any kind of sovereign wealth fund. The trouble is that gold is not well suited as a state asset, as its value is very likely to drop as soon as it is deployed as a government intervention mechanism.

The market is of course very different to that of two decades years ago, and any government selling today will not have anywhere near the same impact. But this doesn’t change the cold hard truth that gold is a market best fit for sophisticated speculators. Established financial institutions whose business it is to make big returns for investors are free, and rightly so, to speculate on whatever they like. This does not mean that the State should follow suit and hold gold in reserve to guard against the next economic shock whenever it may materialise.

 

Tim Focas is Director of Financial Services at Parliament Street

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