Britain was not alone in making the mistake of cutting reserves

The rise in the gold price to a 27-year high of about $800 per ounce during the past few months has been disagreeable news for many leading industrialised countries – including the UK – that sold official stocks of the yellow metal in past years.

Gordon Brown, the UK Prime Minister, oversaw, while Chancellor of the Exchequer, the sale of about 395 tonnes of gold from British reserves at prices that appear now to have been exaggeratedly low. The disposals took place between 1999 and 2002, when the gold price was trading between $250 and $330 per ounce. This was a long way below the short-lived peak of $850 reached in January 1980 after the Soviet invasion of Afghanistan, and less than half the current trading range. The 70% increase in the dollar price of gold in the past two years has made many central banks’ calculations look distinctly awry.

An appraisal of the gold price needs to take into account inflation, the fall of the US dollar and the lack of interest receipts on bullion holdings. Taking these factors into account, from the standpoint of an investor from the euro area, the present gold price would need to be about $2,600 to match the 1980 price in real terms. Even allowing for these caveats, however, the timing of the UK bullion disposals appears flawed. Read Full Article