Why Britain is still paying the price for Gordon Brown’s gold bullion blunder

Why Britain is still paying the price for Gordon Brown's bullion blunder
Why Britain is still paying the price for Gordon Brown's bullion blunder

It has been considered one of the worst financial blunders the Government ever made. On May 7, 1999, the UK Treasury announced it would be selling over half of the nation’s gold reserves.

The move, made by then chancellor Gordon Brown, was done in a bid to diversify and strengthen Britain’s reserves by reducing the proportion held in gold.

Yet the sale came at what turned out to be the very bottom of the gold market, ultimately costing the Exchequer billions of pounds in lost profits.

As the 25th anniversary of Mr Brown’s now infamous decision approaches, the price of gold on Monday hit a record high. Here, Telegraph Money looks at what went wrong and what it meant for the UK in the long run.


In 1999, gold was increasingly being seen as a “barbarous relic”, as the economist John Maynard Keynes had described the metal in 1924. The asset had been experiencing a two-decade bear market, having lost 80pc of its real worth from a peak in 1980. The low price meant a number of central banks around the world were looking to offload some of their gold.

The metal is ultimately held by central banks as a safe haven that can be called upon as a last resort in times of emergency, seen as a hedge against inflation, currency devaluation and fiscal turmoil.

In this scenario, Mr Brown was not out of step with other nations for wanting to sell some of the UK’s 715 tonnes of gold, which was owned by the Treasury and managed by the Bank of England. The plan to convert the proceeds into foreign currencies of 40pc US dollars, 40pc Euros and 20pc Yen would also bear interest for the Government, unlike gold.

But the timing of the sale, and the way it was announced, would go on to cause ripples still felt today.

The announcement

The offloading of gold reserves by other central banks up to 1999 had frequently mostly been done quietly on the global markets, only after which details of the sale would be announced. Yet in the UK, the Government publicly announced in May – via a written question in the House of Commons – that it would be holding a series of auctions for 125 tonnes of its gold reserves, starting in July that year, with an eventual plan to sell 415 tonnes by 2002.

The Treasury said it wanted to “achieve a better balance in the portfolio” by increasing the proportion of its reserves held in foreign currencies. Gold made up around 50pc of the UK’s foreign currency net reserves – $6.5bn (£5.1bn) out of $13bn – and this exposure to one single asset, whose price was often volatile and earned no interest, was too great, the Treasury argued.

The announcement stunned the markets, however. Adrian Ash, director of research at BullionVault, an online investment gold service, said: “It landed like a bombshell. I don’t think the Treasury expected it to make as much noise as it did. It was so cack-handed how they handled it.”

Britain’s top gold traders had only been told earlier that day about the planned sale at a meeting at the Bank of England and were shocked by the news. They explained to Bank officials that gold prices tend to move in decades-long cycles, with the price probably near its bottom and likely to increase in the coming years.

They also warned that revealing the timings and amounts for sale so far in advance would cause traders to short the asset – betting on the price of gold falling – which would drive gold down further.

“The timing of the decision was ludicrous. We told them, ‘You are going to push the gold price down before you sell’,” Peter Fava, then head of precious metal dealing at HSBC, told The Sunday Times in 2007. “We thought it was a disastrous decision; we couldn’t understand it.”

Sure enough, the price of gold, which was $282.40 an ounce on the day of the sale’s announcement, had fallen 10pc by the time of the first auction in July. “It was done in a fairly clunky way”, Philip Shaw, chief UK economist at Investec, said of the Government’s announcement. “It probably didn’t do the UK’s standing in international markets much good.”

The Government said a secret sale would have eventually leaked out and provoked rumours that would have pushed the price down further. The announcement of a series of auctions, rather than selling gold through the normal twice-daily price fix, would also increase the number of prospective buyers who could bid “with greater confidence about future supply”, the Government argued.

The sale

Eventually, 395 tonnes of gold were sold by the Bank of England on the Treasury’s behalf; the price ranged between $256 and $296 a troy ounce, with an average of $276, and made a total of $3.5bn.

Gold reached a record high of $2,083 a troy ounce on the London gold benchmark on March 4, having enjoyed a tremendous bull run over the past decade. In the spot market, gold reached an all time high of $2,135 in December last year. The 395 tonnes sold off by the Treasury would now be worth $26.6bn for the UK.

The gold, in other words, was sold at a 20-year-low in the market, and this period has since been nicknamed “Brown’s Bottom” by traders.

One key reason that the sale price was so depressed was that the UK was considered symbolically and historically important in the gold market, with the Bank of England holding and helping to manage gold reserves for more than 40 central banks and monetary institutions at the time.

“For the UK to be selling, it was like, ‘oh wow, this stuff really is finished’. So sentiment wise, it really did knock a hole in gold”, Mr Ash said.

The Government’s handling of the sale was considered so poor that the backbench Conservative MP Peter Tapsell told the House of Commons in June 1999 that “conspiracy theories are widely circulating in the City” that “famous foreign finance houses” had taken out such dangerously large short positions on gold over the previous years that they needed their friends at the Treasury to kill any prospect of a price rise in the metal.

The Bank of England’s then Head of Foreign Exchange, Clifford Smout, denied any conspiracy “with persons known or unknown”. Mr Brown was also suspected of attempting to support the newly launched euro. This was also denied by the Bank of England, which described the idea as “conspiracy theory gone to extreme”.

The immediate aftermath

The Government’s announcement of the sale prompted other western nations to publicly defend having the asset in their reserves. Jean-Claude Trichet, governor of the Bank of France at the time, said that France, Germany, Italy and the US would not sell their gold. In the US, Alan Greenspan, the then chairman of the Federal Reserve, responded to the UK’s sale by saying: “Gold still represents the ultimate form of payment in the world.”

The poor handling of the sale also pushed European central banks to set some rules around gold sales. There was growing concern that uncoordinated sales and lending of gold by central banks were causing issues for the market and driving down prices.

As a result of this, 15 European central banks, including the Bank of England, agreed on 26 September 1999 to limit their sales to 400 tonnes annually over the next five years, and also to announce sales to the market beforehand. Crucially, the central banks also announced that they would not increase their lending above 2,119 tonnes currently out on lease.

The announcement caused a sharp spike in the price – with a two-week gain of 25pc – as it had made gold trading more transparent and had removed uncertainty around the intentions of central banks’ sales.

Effect on the UK

The sale of the gold was reinvested back in the UK’s reserves and so had no palpable effect on the UK consumer or economy as it was not used for public spending or to pay off debt.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “Although much is made of the squandering of a national asset, the main function of such reserve assets is more for precautionary reasons such as intervening to stop a currency crisis, than managing wealth on behalf of the country.”

He added that the need for governments to continue holding large gold reserves is “questionable”.

However, critics argue the poor sale damaged the UK’s reputation on a global stage. Ross Norman, chief executive of Metals Daily, a precious metals data provider, said: “The problem is, once you’ve consumed a significant part of our reserves, it’s very hard to rebuild. I think that damages the UK.”

The sale was also thought to be embarrassing for the Bank of England considering its eminent role in the bullion market, despite it not having control over the decision, which was made by the Treasury. There were press reports that Eddie George, then-governor of the Bank of England, had privately argued against the sale, saying it would erode the Bank’s power base in the City.

However, Mr George told a Select Treasury Committee in May 1999: “People get emotionally attached to gold and we have seen quite a lot of emotional reaction to that decision. However, as a portfolio decision, it is perfectly sensible [to sell the gold]”.

Would there ever be another sale?

Whereas in the 1990s, central banks were trying to offload some of their gold, the reverse is true today. A number of central banks, especially those not aligned with the West, have been buying physical gold in record quantities over the past two years, as the pandemic, inflation and geopolitical tensions, such as war in Ukraine and the Israel-Gaza conflict, boost its popularity as a safe haven.

Gold, if held in a nation’s own vaults, cannot be frozen or accessed by others. Other countries are looking to reduce their dependence on the US dollar, such as China, which bought 225 tonnes of gold in 2023.

However, the likelihood of the UK either buying or selling more gold is virtually nil. Mr Norman added: “Selling any of its gold reserves at this stage would be regarded internationally as the UK being in absolute dire straits and would be most definitely counterproductive.”

Attempts to buy more gold would also appear that the UK is worried about the stability of the global financial market. “These guys will never say much or do anything with gold for at least another generation,” Mr Ash said. “Western central banks are still so paralysed by the PR disaster of their sales 20 years ago – it wasn’t just the UK by any stretch – that whatever they do with gold now would look ridiculous.”

Lessons for consumers

Private investors should take Mr Brown’s poor sale as evidence that there is a danger of herd thinking in financial markets. Mr Ash said: “It felt like every major nation was selling gold, cutting their bullion holdings as the hype around tech stocks and Western triumphalism in geopolitics ushered in the 21st century. Yet since that gold price low for UK investors in 1999, physical bullion has beaten all UK asset classes hands down.”

The rise in gold prices has also shown the value of holding a little gold in a portfolio. Analysis by BullionVault shows that adding 10pc to a portfolio otherwise split 60:40 between UK equities and bonds would have raised annualised returns from 5pc to 5.6pc across the past quarter century, and it would have boosted a private investor’s worst 5-year returns of the last half-century (ending 2022) from 0.6pc to 1.6pc per year.


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