Former U.K. Prime Minister Gordon Brown May Be Responsible for Gold Bubble

With the sale of over half of the UK’s gold reserves from 1999 to 2002, when gold prices were at their lowest in 20 years, the man who later became Prime Minister prompted one of the worst financial blunders in recent history and launched the gold bubble that has lasted for over 12 years.

After a nearly 20-year bear market in gold, from the $850/oz high in January 1980 to nearly $250/oz in mid-1999, UK Chancellor of the Exchequer Gordon Brown, decided to sell more than half of the country’s gold reserves and reinvest the proceeds in foreign currencies – including Euros and Dollars. The official reason given for this decision was to “achieve a better balance in the portfolio (the UK’s reserve holdings) by increasing the proportion held in currency.” Yet although Brown’s intention may have been to diversify the UK’s reserves away from the tremendous weakness in gold that had persisted for over 19 years, his decision to sell the gold reserves was made at the worst possible time!

Announcing the UK government’s plan on May 7, 1999, when the price of gold was $282.40 an ounce, Brown not only sold at almost the lowest price possible, but his advance notice of the significant upcoming sales drove down the price an additional 10 percent by the time of the first auction on July 6. Prices bottomed out at $252.80 on July 20, 1999 and have since soared to over $1600.

Gordon Brown’s terrible decision, which saw the UK sell approximately 400 tons of gold in 17 auctions from July 1999 to March 2002 – at an average price of $275/oz – has been called the “Brown Bottom”, since his plans to sell triggered “hysteria and a negative sentiment in the market”, drove gold prices even lower, and marked the lowest gold prices since 1979.

Moreover, Gordon Brown’s exit from gold in order to reinvest proceeds into foreign currencies has been terrible on both fronts. Not only is gold up nearly 500 percent since the UK sold its gold, but the currencies which Brown simultaneously decided to invest in are down tremendously over the same period.

Currencies have been in a clear and steep downtrend in comparison to gold since 1999:

click on images to enlarge

And the US Dollar has lost nearly 40 percent of its value since 2001, while gold has soared:

Source: The Dollar and Gold: A 20-Year Perspective

Brown’s decision even went against the advice of the financial experts, who warned that the price of gold was nearing a multi-decade low and that announcing the timing and amounts of gold sold through auction would plunge the price even further. Martin Stokes, former vice-president at JP Morgan, was surprised that the auction method was chosen, saying “it indicated they did not have a real understanding of the gold market.”

The announcement of the upcoming gold sales also prompted a response from the most respected bank governors of other leading economies – Alan Greenspan and Jean-Claude Trichet. Greenspan, chairman of the US Federal Reserve, defended gold, saying “gold still represents the ultimate form of payment in the world.” Trichet, governor of the Bank of France and later head of the European Central Bank (ECB), also defended gold, saying that according to France, Germany, Italy, and the US – “the position is not to sell gold.”

To make matters worse, 15 European central banks signed the Washington Agreement on Gold in September 1999, limiting the sale of gold to 400 tons per year. This pivotal decision by a powerful group of central banks to support gold prices marked a critical structural change in gold policy.

In response to Gordon Brown’s ill-timed and poorly-executed announcement to sell the UK’s gold reserves, the Central Bank Gold Agreement offered protection for gold prices, and even triggered a surge in gold prices from approximately $260/oz to around $330/oz in two weeks; prices have not dropped below their July 1999 lows. Started by Gordon Brown and confirmed by central banks around the world, the “Brown Bottom” marked the end of the gold bear market and the beginning of the gold bubble, which has been accompanied by parabolic price increases, over-speculation, and extreme expectations.

Sources:

• Clive Maund (2007-04-01). "The Gold Bull Market Remembers How Gordon Brown Sold Half of Britains Reserves at the Lowest Price". Marketoracle.co.uk. http://www.marketoracle.co.uk/Article670.html.
• Watt, Holly; Winnett, Robert (15 April 2007). "Goldfinger Brown's £2 billion blunder in the bullion market". London: Times Online. http://www.timesonline.co.uk/tol/news/politics/article1655001.ece.

Disclosure: I am short GDX using put options.